OPEC faces output juggling act over oil prices

Published November 12th, 2000 - 02:00 GMT

Oil ministers from OPEC countries converge on Vienna this weekend to discuss tactics to ensure that sky-high oil prices do not tumble to earth as fast as they have risen in recent months. 

 

Four times already this year the 11-nation Organisation of Petroleum Exporting Countries (OPEC) has increased its output ceiling to pump more crude to a market thirsty for crude. 

 

But OPEC ministers will be highly reluctant to open the floodgates any further. 

 

"Their main concern is that they could end up with too much oil on the market," said a London-based analyst who follows the oil market for a US investment bank.  

 

"Prices have moved up quickly and could move down just as fast and that's what OPEC does not want." 

 

Oil ministers have a delicate balancing act to perform. They know high oil prices deliver handsome windfalls, in many cases providing a welcome boost to threadbare budgets. 

 

But they also know that if prices persist above 30 dollars a barrel through the long term, it will backfire on them by undermining world growth and encouraging non-OPEC countries to boost output, threatening an eventual glut. 

 

But OPEC is just as wary of a fall in the price, and to try and steer a middle course it set up in March a stabilization mechanism which invokes an output hike if the price persists above $28 dollars a barrel for 20 working days and a cut if it falls below $22. 

 

The mechanism was triggered last week, bringing another 500,000 barrels a day to the market. 

 

"A hike linked to the mechanism less than two weeks before the conference was clever," said Frederic Lasserre, an oil analyst with Societe Generale in Paris. 

 

"It has allowed OPEC to avoid getting involved in Vienna in a political debate about the prospects for raising production while the Israeli-Palestinian conflict is raging," he said.  

 

But although no further increase is expected to be announced, the market is looking for clarification from OPEC in Vienna this weekend on the price mechanism system. 

 

The mechanism has thus far not worked automatically, because OPEC nations do not want to become hostage to it. 

 

"We will need to have an answer on the price mechanism, which theoretically should be triggered again if the price stays above 28 dollars for another 20 days," said Lawrence Eagles, an analyst with the GNI brokerage in London. 

 

"What's more, the only country that can raise its output is Saudi Arabia," Eagles added. 

 

Saudi Arabia is currently producing more than nine million barrels a day, according to the Petrostrategies weekly, leaving spare capacity of little more than one million barrels. Other OPEC countries between them have a bare 400,000 barrels spare capacity. 

 

This makes further increases technically difficult.It would also make it well nigh impossible for OPEC to cover a shortfall that would be created if Iraq were to freeze its exports, which has been threatening to do because of a row with the United Nations over the oil-for-food programme. 

 

The programme comes up for renewal in December, and while most analysts believe Iraq's posturing is pure bluster, they also warn that it may never have a better chance to break the sanctions against it. 

 

Iraq exports more than two million barrels a day -- five percent of world exports. Depriving the market of that oil would prompt a sharp price spike and force OPEC to review tactics once again, analysts say. 

 

Despite these factors, OPEC remains more concerned about too much oil hitting the market than too little oil, analysts say. 

 

The northern hemisphere winter has proven relatively mild in terms of temperature, and the oil nations are fretting that come the new year there will be too much oil chasing too little demand. 

 

OPEC "is right when it says that the spike in prices does not come from a shortage of supply: there has been a surplus of crude since April and oil stocks will rise in December and January in the US and Europe," said Lasserre. 

 

Aside from the delicate question of output quotas, ministers are also likely to discuss OPEC's budget and try and elect a successor to secretary general Rilwanu Lukman at the weekend gathering.—AFP. 

©--Agence France Presse. 

 

© 2000 Mena Report (www.menareport.com)

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