The 113th ministerial conference (extraordinary) of OPEC convened in Vienna Jan 17th. The understanding of the members on the threshold of the meeting and the rapid agreement on the output cut was very rear if anything.
Almost all members thought a reduction of 1.5 to 2 mb/d of the output to be an adequate response to the prevailing market situation. A fact which quickly lead to a unanimous decision to cut the ceiling by 1.5 mb/d.
Before the meeting, a mere announcement of a cut, pushed up the prices. This could well have a negative impact on the OPEC decision.
However the organization, making good use of their bitter experience of 1998, managed to hold together and made a rational decision towards market stability.
Or else the prices would continue to drop because, on the one hand Iraq is expected to pump at its maximum capacity and on the other, a reduction in the demand due to overhaul of refineries and the end of cold season coupled with a slower rate of economic growth in certain countries, including the U.S. and Japan, would ngatively affect the prices.
Thus, the timely decision by OPEC boosted the prices to the members benefit.
OPEC has always proved to play a pivotal role in stabilizing the market, for which timely and appropriate reaction to the market fundamentals is a prerequisite. The OPEC should, therefore, adopt a suitable mechanism to help stabilize the market.
It is a known fact that OPEC is quick to arrive at a decision on output hikes, while a reduction in the production is usually easier said than done.
At such times it is hard to decide the basic volume of the reduction and even harder to agree on new quotas. That is exactly why the outcome of the said meeting of Jan 17th seems to be unprecedented.
To cite certain reason for such a trend one could consider following points:
1)Seemingly recent years have seen a change in the Saudi oil policy.
This most influential member country has incorporated price considerations into its traditional market share view. The economic situation of the Kingdom is such that it can not afford to be indifferent to the global oil prices.
The reports of the trip of the outgoing Energy Secretary of the U.S, Bill Richardson, to Ryadh indicate that the Saudi authorities refused to yield to any pressure.
2)The outcome of the OPEC conference of 26th Nov.97 held in Jakarta and the bitter memory of the ensuing collapse of the prices as a result, has served as a lesson to avoid recurrence of a similar situation.
All member states are fully aware of the fact that the peculiar status of oil in the world economy and its price elasticity are such that even an insignificant excess supply in the market can cause a sever collapse of the prices.
3)Fluctuations in the production of the OPEC members during the recent years along with the introduction of the price band mechanism coupled with lack of any basic change in the production capacities of the members, have determined the way to share out quotas.
No doubt agreement on any further cuts, and if necessary, for several times may not be as easy as it was in the said meeting.
Likewise, any significant rise in the production capacity of a member country might make an orderly quota reduction difficult.
4)Following few times of production increase by OPEC, particularly after the last one, many members were unable to meet their increased quotas sustainably, but normally no members concedes to the fact for the fear of losing their traditional shares.
Such members were forced to either stretch their capacities or play with their domestic consumption and reserves so as to appear to be producing their increased quotas.
This could not last long and therefore they were quite eager to cut production. That way they would be more at ease.
5)Any reduction in the OPEC production ceiling can mean availability of excess production capacity.
While the overall excess production capacities have been reduced to their lowest in two decades, any production reduction (and hence having some capacity in reserve) when the fundamentals allow it without straining the market, can be beneficial to the consumers as well.
Another important point in the said OPEC conference was that the organization has floated the idea of a further cut in the near future (probably in March).
This can further strengthen the market, as expectation is a decisive and important factor to that end.
Naturally as the quotas are respected and the global economic situation becomes more transparent, decision making for OPEC's future conference will be made much easier.
By then, even if Iraq is capable of producing its previous quota of 2.8-3mb/d, OPEC's overall production level will not alter much.
Because Iraqi production increase will simply make up for the production cut by other members. In which case the issue of production cut by OPEC will be even more serious in their March conference.
By and large OPEC is expected to cut production by another one million barrels per day, but if Iraqi production increases and the global demand reduces, the final OPEC cut may be even more than that.
Source:IIES.AC.IR
© 2001 Mena Report (www.menareport.com)
