Once again, OPEC finds itself forced to embark on the tricky process of output cutbacks in order to achieve its price objectives.
The first move in this direction will take place at OPEC’s 17 January extraordinary ministerial meeting in Vienna, which is expected to endorse a recommendation widely agreed upon in the pre-conference consultations to reduce production by approximately 1.5mn b/d as of 1 February, or a 5.6 percent cut from the November 2000 ceiling of 26.7mn b/d for the OPEC 10 (MEES, 6 November 2000).
Saudi Aramco has already taken steps to reduce its February production by around 500,000 b/d, in proportion to its share of the OPEC ceiling, and has informed its customers accordingly (see page, A5).
The OPEC decision to cut production, endorsed by the GCC heads of states at their summit in Manama on 31 December, has been taken in light of serious concern about oversupply in the markets as winter ends, as well as the slowdown in the US economy with its impact on oil demand.
The point was driven home very clearly during December and earlier this month when prices fell by around $10/B even though Iraqi oil supplies were disrupted and winter weather had already set in.
OPEC officials tell MEES that if there were to be no serious production cut beginning in February, there would be a counter-seasonal stock-build in the first quarter followed by a larger stock-build in the second-quarter, leading to a serious decline in prices.
IEA deputy executive director William Ramsay cautioned OPEC on 11 January about the proposed production cuts. “I have some reservations about what’s out there in the public discourse.
I would urge caution in making these kinds of decisions. They have got more than just barrel impacts.
They have got psychological impacts. They have unexpected market impacts.”
He added, “we are dealing with a market that is still not recovered from 18 months of supply restraint. Inventories are lower in aggregate, and they are not distributed as uniformly as we would like to see.
So you have got a relatively fragile market that does not take well to announcements of supply cuts.”
The fact that US Secretary of Energy Bill Richardson is visiting several producing states prior to the OPEC meeting in order to urge moderation is not expected to change OPEC’s mind.
The wild card, as far as the ministerial meeting is concerned, is the disruption of Iraqi oil supplies, now in its sixth week. A senior OPEC delegate told MEES: “We recognize that there is a shortfall of Iraqi oil exports.
If OPEC sees there is a real shortage in the market, then it will act immediately. Otherwise the OPEC 10 will continue to act on their own.”
Assuming a call on OPEC crude of around 28mn b/d for the first quarter, and an actual OPEC cutback of 1.2mn b/d as from 1 February (ie allowing for a slippage of 300,000 b/d from the official quota reduction of 1.5mn b/d), and assuming Iraqi production is maintained at approximately the same 1.2mn b/d as in December, OPEC production in January could be projected at 27.9mn b/d (26.7mn b/d for the OPEC 10 and 1.2mn b/d for Iraq), falling to 26.7mn b/d in February and March (25.5mn b/d for the OPEC 10 and 1.2mn b/d for Iraq), working out at an average of 27.1mn b/d for OPEC first-quarter production.
This would indicate a potential first-quarter stock-draw of around 900,000 b/d.
However, if Iraq returns to the market any time soon with the normal range of production of over 2.5mn b/d, this would more than offset the inventory draw-down that OPEC was hoping to create, necessitating a further cut in production in order to defend prices.
Iraq produced 1.2mn b/d in December (not 1.8mn b/d as was reported incorrectly in MEES, 8 January).
Exports under the oil-for-food program averaged 600,000 b/d, plus another 600,000 b/d for domestic consumption and cross-border trade with Jordan, Turkey, Syria and the Gulf.
Liftings carried out so far and information on fixed tankers for the rest of the month indicate that the export program will continue at a minimum rate, with a substantial decline in Iraqi oil exports for two successive months.
Iraqi Crude Oil Production (Revised)
(Mn B/D)
2000 Average
Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan 2000 1999 1998
1.20 2.70 2.96 2.81 3.00 2.44 2.54 3.03 2.63 2.16 2.59 2.18 2.52 2.54 2.11
However, if Baghdad changes its mind and agrees to lift the surcharge, exports could resume quickly.
There are currently 65 UN-approved purchase contracts (from the previous 8th phase and the current 9th phase) with a volume of over 118mn barrels of crude oil waiting to be lifted. Of these, MEES learns that nine contracts have been approved for the 9th phase, as follows: Belmetalenergo (Belarus), 4mn barrels each of Kirkuk and Basrah Light; Italtech (Italy), 4mn barrels each of Kirkuk and Basrah Light; Montegra (South Africa), 2mn barrels of Basrah Light; Fenar (Lichtenstein), 4mn barrels of Basrah Light and 2mn barrels of Kirkuk; Quantum Holdings (Malaysia), 2mn barrels each of Kirkuk and Basrah Light; Awadammora (Syria), 2mn barrels of Kirkuk; Penzol (UAE), 2mn barrels each of Kirkuk and Basrah Light; Urdum (Turkey), 2mn barrels each of Kirkuk and Basrah Light; and Sidanco (Russia), 2mn barrels of Kirkuk.
Since the imposition of the 50 cents/B (later reduced to 40 cents/B) surcharge on 1 December, major international oil companies have not lifted Iraqi oil. However, some are wondering what to do next.
A major European oil firm told MEES: “If the UN overseers are approving the price formulas and the contracts, and if Iraqi oil is offered to us by the primary lifters on a competitive basis with other crudes, and if there is no overt evidence of a surcharge payment, why shouldn’t we buy the oil?”
Nonetheless, most major companies continue to take the view that they cannot buy Iraqi oil unless they are absolutely sure that no surcharges are paid – and SOMO, under orders from the political authorities in Baghdad, continues to demand a 40 cents/B surcharge to be deposited in an independent account outside the authority of the UN.
MEES soundings indicate that with OPEC cutting supplies, companies could be looking for alternative barrels, a fact that could result in more Iraqi oil flowing to the markets.
It is not clear why the Iraqis imposed the surcharge when they were well aware that it would be opposed by the Security Council and the international oil companies, the latter having told SOMO in advance they could not cooperate with a demand which openly violates UN resolutions.
Nor is it clear why Baghdad is sticking to this policy after having lost around $1bn of oil revenue in December for no political gain. In fact, the absence of Iraqi oil from world markets has barely been reported in the international media (or the Iraqi press for that matter).
Until Iraq returns to the market – and when that might be is anyone’s guess – the OPEC 10 will have little choice but to proceed independently of Baghdad, because they are as much in the dark as anyone else.
(mees)
© 2001 Mena Report (www.menareport.com)
