Frederick P. Leuffer on OPEC & Oil Prices on NRO Financial
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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.

       

 

 
http://www.nationalreview.com/nrof_leuffer/leuffer092903.asp