News analysis: OPEC too late to douse blazing oil price
Copyright 2000, Reuters
September 7, 2000
By Richard Mably
Unwilling or unable, OPEC producers meeting on Sunday will fail to remedy the shortages that are likely to keep crude prices aflame this winter.
Fearful of a premature end to one of the most prosperous periods in the cartel's history, oil ministers in Vienna are expected to adjust production quotas only modestly higher.
Leading OPEC power Saudi Arabia has softened up fellow producers for more than the standard 500,000 barrels daily that would come anyway under an automatic cartel price mechanism.
Unless Riyadh is preparing to unveil a surprise, dealers can expect an addition of no more than 700,000-800,000 bpd, a three percent increment over limits now of 25.4 million
"They have to raise supply by more than 500,000 bpd. The market needs a strong message," said Mehdi Varzi of Dresdner Kleinwort Benson.
The Organisation of the Petroleum Exporting Countries is under severe pressure from consuming nations to do something, anything to ease fuel bills.
Warnings come daily from the European Union, the United States or Japan that rising energy costs are stoking inflation. Some see recession around the corner.
But OPEC appears to have lost control over the price rally it sparked with production curbs two years ago.
Crude prices now at a decade-high of more than $33 a barrel mean a winter of discontent for petroleum consumers looks unavoidable.
"It's probably too late. I think it's out of OPEC's hands now. Prices are going to stay high this winter," said Gary Ross, chief executive of leading U.S. energy consultancy PIRA.
"OPEC has perpetuated this low inventory situation and now everyone's panicking."
Refiners perpetuate low inventories
OPEC already has lifted output twice this year, by a combined 2.4 million bpd, easing limits from two years ago.
Emboldened by early success in lifting prices from a 22-year low of less than $10, the cartel argued it could micromanage markets into a soft landing.
But market observers say OPEC failed to open the spigots quickly enough this year, allowing growth in demand to empty worldwide stocks of crude and petroleum products.
Today, including supply from Iraq, not bound by a quota, the group is supplying as much as at any time since 1980 — some 29 million of the world's production of 75 million barrels a day.
There is strong evidence that the oil industry, for sound commercial reasons, also has failed its customers.
High prices, particularly in a market which values prompt oil at a premium, mean refiners prefer to keep inventories as low as possible — operating hand-to-mouth.
"There is a refinery bottleneck and if customers don't want crude the Saudis can't force-feed them," said Ross.
Price discounting discounted
If OPEC were prepared to combine more supply at sharply discounted values — a highly unlikely prospect — then crude prices would slump. The last time that happened in 1986 prices fell through the floor.Saudi Arabia, the only OPEC nation with significant surplus capacity, would prefer $25 crude.
"If they want stable prices at $25 this winter they will have to oversupply the market with crude," said Lawrence Eagles of brokers GNI.
"At the moment the market doesn't feel confident that OPEC will provide the oil in a timely fashion."
Saudi Oil Minister Ali al-Naimi insists Riyadh already is doing its best to achieve that goal. In New York this week he said the kingdom already was leaking an extra 600,000 barrels a day.
"There is absolutely no problem putting additional crude oil into the market," said Naimi.
But he added the qualification that refiners had become more efficient and that the industry was comfortable with lower inventories. "Eventually a lot of this price is hype."
If OPEC merely meets expectations this weekend, then finance ministries around the industrialised world will have more to say about oil prices this winter.
"With prices where they are we begin to flirt more with a global recession. We need more oil," said Ross at PIRA. "But they can only put so much through the sausage machine."