September
29, 2003, 8:30 a.m. Inside
OPEC’s Surprise Cut
The cartel wants
revenue enhancement, but high oil supply will lead to a lower barrel
price.
PEC
surprised the market last week by announcing a 900,000 barrel a day reduction
in quotas, effective November 1. The announcement quickly boosted spot
oil prices, which jumped $0.89 a barrel to $28.02. But that doesn't mean
oil prices are necessarily on an upward trend.
OPEC's
decision offsets the action taken at the April OPEC meeting, when quotas
were raised by 900,000 barrels a day effective June 1 (although the organization
announced a simultaneous 2 million barrel-a-day cut in production at that
time). However, since June, production by the OPEC 10 — those OPEC
countries that have quotas — has risen by 70,000 barrels a day,
to 25.8 million barrels. Including Iraq, production has risen by 640,000
barrels a day, to an estimated 26.9 million barrels.
For now, OPEC is
sending a signal that it remains focused on revenue enhancement, at the
expense of market-share protection. But it remains to be seen whether
OPEC will actually cut production. Through August, only Venezuela (which
is still suffering the effects of the oil workers’ strike) and Indonesia
are in compliance with current quotas.
More, world oil
supply exceeds fourth-quarter 2003 demand by about 1.1 million
barrels a day. OPEC production, meanwhile, is expected to rise further
in September — owing to increased Iraqi production, which has risen
to approximately 1.5 million barrels a day.
The time test for
OPEC will come when production recovers in Iraq, and, possibly, Venezuela
and Nigeria. If Iraqi output rises to 2.5 million barrels a day, as the
U.S. government forecasts, Venezuela reaches its 3.1 million barrel-a-day
target, and Nigerian output recovers to 2.4 million barrels a day, supply
could exceed demand by 4.2 million barrels a day in 2004.
All this boils down
to a lower barrel price, which could be $18 for the full-year 2004. Of
course, a sharp fall in oil prices will be bad for oil stocks, but good
for the broader market.
—
Mr. Leuffer, CFA, is senior managing director and senior energy analyst
for Bear Stearns & Co. Inc.
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PEC
surprised the market last week by announcing a 900,000 barrel a day reduction
in quotas, effective November 1. The announcement quickly boosted spot
oil prices, which jumped $0.89 a barrel to $28.02. But that doesn't mean
oil prices are necessarily on an upward trend.
