Oil prices fall as OPEC surprises with promise of extra production
(AFP, LONDON) - Crude oil prices fell Monday after leading oil producers appeared at last to have reached agreement on a further output increase to stabilise the market if prices remain high.
In London, the price of benchmark Brent crude for September delivery slipped 59 cents to $28.64 a barrel. At the end of last week, the Brent August contract ended at $29.88 a barrel.
In New York, light sweet crude for August delivery was trading 69 cents lower at $30.71 a barrel.
For the first time for weeks, prices in London and New York began to fall significantly early this month after the world's leading oil producer Saudi Arabia pledged on July 3 that there would be a 500,000 barrels per day increase unless prices eased.
However, prices had edged higher again after other members of the Organisation of Petroleum Exporting Countries (OPEC) objected to what they termed Saudi's "unilateral" stance.
At the end of last week, expectation mounted that an emergency meeting would be called at OPEC's Vienna headquarters.
But then Venezuelan Oil Minister Ali Rodriguez, who is also president of OPEC, ruled out an impromptu conference and said any decision to raise production would be left until late July or early August.
On Monday, a statement from OPEC said Rodriguez, who is on a tour of OPEC members, had notified fellow producers that "in the event of prices remaining at the current levels, they should be prepared to take the necessary steps to raise ouput" -- probably at the end of this month.
The increase independent of a formal meeting would effectively mean employing Rodriguez's pet scheme of a price band mechanism, providing for an automatic output rise of 500,000 barrels per day if the price of a basket of OPEC crudes stays above $28 for 20 working days.
The device was put forward by Rodriguez and informally agreed at OPEC's
In June, it was dismissed as "irrelevant" by OPEC Secretary General Rilwanu Lukman. But analysts later said that OPEC had simply changed the rules for implementing it and that the deadline for it to kick in should now fall on July 28 unless the price dips.
In London, analysts said that presenting the 500,000-barrels increase as activation of the mechanism, favoured by Venezuela and other smaller OPEC members, rather than allowing OPEC heavyweight Saudi Arabia to assert its will, could be seen as a continuation of the spirit of compromise to some extent demonstrated in June.
That meeting agreed to increase output by 708,000 barrels per day.
The figure was less than the million extra barrels that the world's thirstiest consumer, the United States, was said to consider necessary and Saudi Arabia was believed willing to provide.
According to Monday's statement, the planned extra output would be shared between 10 OPEC members, although Saudi Arabia would account for the lion's share.
The 11th member Iraq does not have a quota as it is subject to UN sanctions.
Analyst Lawrence Eagles at GNI Research was sceptical that all OPEC members would be able to meet their proposed output levels.
"They are not saying anything more than what was said before. It increases the possibility of an output hike. But it is still linked to the price mechanism," he said.
"And it's an across-the-board hike. This means that any output hike is going to be just around 50 percent because of capacity constraints.
"According to my calculations, that means an output hike of 262,000 barrels, and not 500,000. It's a little bit disapointing, but it does show that OPEC is prepared to supply more oil."
Chief economist Leo Drollas at the Centre for Global Energy Studies said that Saudi Arabia, for example, could "cheat" or pump more than its proposed new quota of 162,000 extra barrels per day.
In its monthly report, the London-based Centre for Global Energy Studies said that the petrol (gasoline) shortage of the summer months could be replaced by a heating oil crisis as winter sets in in the northern hemisphere, given that middle distillate stocks are "unseasonably low."
But, provided that OPEC does add the extra 500,000 barrels, it said stocks should reach more normal levels by the end of this year.
OPEC, it suggested, should then cut back production or there could be an overly sharp fall in prices next year.
By Barbara Lewis
© Agence France-Presse 2000
© 2000 Mena Report (www.menareport.com)