OIL: Continued Price Debacle Bodes Ill for Coming OPEC Meeting

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Jun 19 1998 (IPS) - Oil prices fell even faster this week, dampening hopes that next week’s ministerial-level OPEC conference would be able to revert the downturn.

Prices continued to slide for the second week in a row after the Jun. 4 announcement of a collective cutback in production – the second in less than two months – failed to impress a market saturated by months of over-production.

Venezuelan Energy Minister Erwin Arrieta said Friday that the two-day biannual conference of OPEC (Organisation of Petroleum Exporting Countries), which opens Wednesday in Vienna, “will not have a magic or instantaneous effect.”

Luis Giusti, the president of Venezuela’s state-run oil company, PDVSA, said in New York meanwhile that the market would not respond to producers’ efforts to bolster prices until far into the third quarter of the year – in other words, late autumn in the northern hemisphere, when demand will start to rise again.

Arrieta said in the presidential palace of Miraflores that by the close of the week, the main international benchmarks had fallen between 1.13 and 1.76 dollars, compared to last week’s close.

The benchmark Brent Crude stood at 10.87 dollars per barrel, 1.13 down from last Friday. Its average for the year is 13.84 dollars, compared to 19.06 in 1997, according to the Ministry of Energy report.

The U.S. benchmark West Texas Intermediate closed at 12.14 dollars, down from last week’s 13.90, which put the year’s average at 15.41 dollars, against last year’s 20.56 dollars.

The OPEC basket stood at 10.70 dollars, after closing at 11.92 dollars last Friday. The annual average fell to 13.08, down from 18.68 in 1997.

The jitters caused by the impact of the unstoppable slide in prices in countries which depend on oil, like OPEC members and other producers in the developing South, led to an exchange of veiled accusations of over-production among key members of the organisation this week.

Giusti said PDVSA studies led to the conclusion that some exporter had been trading around 600,000 barrels per day (bpd) this month on the secondary market, which caused the new fall in prices.

A few commentators interpreted Giusti as referring to Saudi Arabia, although he mentioned no specific country.

Iran, meanwhile, OPEC’s second leading exporter following Saudi Arabia, accused Venezuela of producing more than the agreed-upon level. But Arrieta denied that charge, and said unfounded speculation was creating a climate of artificial tension.

On Mar. 22, OPEC members Saudi Arabia and Venezuela and independent producer Mexico reached un unprecedented secret agreement in Riyadh to cut their production of crude by 600,000 bpd for the rest of the year.

The Riyadh pact was adopted by the 11 members of OPEC as well as independent exporters, with the exception of Great Britain, and has led to the withdrawal from the market of 1.4 million bpd since April, Arrieta said Friday.

He added that the second cutback – of 450,000 bpd as of July, agreed on by the members of the Riyadh pact in another secret meeting on Jun. 4, this time in Amsterdam – would bring the reduction to a total of 2.1 million bpd.

But the announcement, far from giving prices a boost, was the starting-point of an even faster downward slide in prices, even on the futures market, which implies that traders do not expect segments of unsatisfied demand in the next two months.

Before setting out to Norway on Friday, Arrieta said he still entertained hopes that Oslo would agree to participate in the collective cutback, even though Minister Merrit Amstrat had already refused.

He remarked that it was not a question of creating “a kind of syndicate” of exporters, but of the need for producers and consumers to “grant the market balance and stability, so that price, volume and the entire international spectrum of petroleum achieve a balance suitable to all.”

Venezuela, whose export cocktail closed this week at the lowest price seen in 30 years, 8.73 dollars per barrel, needs the year’s average to stand at around 13 dollars per barrel, the price on which its budget is based, because the budget has already been adjusted twice.

But the average price per barrel closed at 11.27 dollars, far below 1997’s 16.32 dollars and 1996’s 18.39 dollars.

Oil accounts for 77 percent of foreign-exchange, 40 percent of the budget and 22 percent of Gross Domestic Product (GDP) in Venezuela.