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COMMODITIES: Oil Prices Scoff at OPEC Cutbacks

Estrella Gutierrez

CARACAS, Jun 26 1998 (IPS) - Oil prices scorned the major cut in production decided on by OPEC this week, in one more sign that recent cutbacks have come too late for a market flooded by crude oil.

The ministers of the 11 members of the Organisation of Petroleum Exporting Countries (OPEC) decided in Vienna Wednesday on a collective withdrawal of 1.38 million barrels per day (bpd), to go into effect Jul. 1.

The benchmark Brent Crude closed at 13.43 dollars a barrel Thursday, when prior to the OPEC decision Wednesday it stood at over 14 dollars.

Although the new cutback agreed on by OPEC is 300,000 bpd higher than expected, the measure failed even to push prices up on the futures market.

The new collective OPEC cut was added to a 1.245 million bpd reduction in effect since April, plus another 450,000 bpd cutback at that time by independent exporters headed by Mexico.

Venezuelan Energy Minister Erwin Arrieta reported from Vienna that Saudi Arabia and Venezuela would cut an additional 425,000 bpd, pushing the total withdrawn from the market by OPEC to over three million bpd compared to March sales.

The first cutback in April was the result of an agreement reached Mar. 22 in Riyadh, promoted by OPEC members Saudi Arabia and Venezuela and independent exporter Mexico.

At a Jun. 4 meeting in Amsterdam, the ministers of the same three nations pushed for a further cut in production, adopted this week by OPEC. Nevertheless, prices continued to crash, reaching lows similar to those seen during the 1986 debacle.

“OPEC acted courageously, but did so too late, when buyers already have so much oil accumulated that their biggest concern is where to store it,” an executive of a major investment bank told IPS from New York.

Other analysts said that besides the stockpiling of the equivalent of more than 90 days worth of consumption by the big importers, the market is sceptical as to the discipline with which exporters will comply with the agreed upon cutbacks.

Minister Arrieta said OPEC was facing the challenge of rebuilding its credibility, in a market where no single producer or group wields a decisive influence, as it is dominated by “the intermediaries who trade the contracts on the futures market.”

The so-called secondary sources of information on each country’s production levels, such as the International Energy Agency, Petroleum Intelligence Weekly or Platts, say that since April, Iran – OPEC’s second leading exporter – produced 80,000 bpd more than it had agreed.

And others sources say Saudi Arabia, the world’s top exporter, produced 300,000 bpd more.

Without naming specific countries, Luis Giusti, the president of Venezuela’s state-run oil company, said that according to the secondary sources, a total of 600,000 bpd more than the agreed upon upper limit flowed onto the market since mid-May from the nations that agreed to the first cut in production.

The intensification of the Asian crisis, Japan’s entry into a recessive phase and a weakened U.S. economy have all colluded since April in neutralising the positive impact of the cuts in production.

And even more so when by then consumers and traders had accumulated large stocks, and Iraq had begun to produce some 450,000 bpd more than expected, as part of the United Nations oil- for-food agreement.

The expected lifting of restrictions on Iraq’s oil exports by the end of the year – even though due to technical reasons it will take a while for the country to return to its pre-1991 Gulf War production levels – is another element keeping prices down.

“Even with all the cutbacks, production as of July will be more than half a million bpd above demand,” which will continue to wane until the start of the northern hemisphere winter, according to operators in London and New York.

The OPEC basket has averaged 13.08 dollars a barrel so far this year, compared to 20.29 dollars a barrel in 1996 and 18.68 dollars in 1997. Brent Crude stands at 13.80 dollars, down from 20.70 dollars in 1996 and 19.06 in 1997. The average price per barrel of the U.S. benchmark West Texas Intermediate is 15.30 this year, down from 22.21 dollars in 1996 and 20.56 dollars in 1997.

Venezuela, meanwhile, watched while its export barrel plunged to 8.70 dollars last week, bringing this year’s 1998 average to 11.27 dollars, compared to 16.32 dollars last year and 18.40 the year before.

The Venezuelan economy, which depends on oil for 40 percent of its fiscal revenues, has seen the foreign exchange taken in from oil dive five billion dollars so far this year, due to the price drop, according to Planning Minister Teodoro Petkoff.

The Central Bank of Mexico, in the meantime, revised its projections of the impact the crash of oil prices would have, announcing Thursday a five billion dollar fall in revenues for 1998 – double the amount predicted just last week by Energy Minister Luis Tellez.

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