With a worldwide recession looming and markets in turmoil, the global financial community is looking to OPEC this week to come up with a gesture to help the world economy back on its feet. Energy chiefs from the 11-nation Organization of Petroleum Exporting Countries converge on Vienna for a gathering Wednesday, September 26, to discuss oil policy and set output.
The get-together was a scheduled part of the OPEC calendar, but it takes on a rather more urgent tone in the wake of the terrorist attacks on New York and Washington. With the enormous shock that the kamikaze strikes dealt to the global financial system, Western leaders are impressing on OPEC the need for special measures on price or output to ensure that the world does not slip into recession.
The traditional argument is that five dollars off the price of a barrel of oil provides a similar kind of economic stimulus as a half-point off interest rates. Central banks around the world have already done their bit, but a coordinated round of interest rate cuts last week failed to rally markets.
So now economies reeling from the shockwaves reverberating from the World Trade Center devastation are hoping for an additional stimulus from OPEC. Whether they get it or not is another matter.
"OPEC would be nuts to raise production," said Dave Leggate, an oil expert with Commerzbank in London. "We may see a gesture, but I'm not sure if this is the right time. The signals are there that we have got to be careful over demand, and if OPEC goes ahead and increases production, it will accelerate a fall in the oil price," he said. "With all their demand concerns they have at the moment, Saudi Arabia and OPEC would be completely nuts to increase production by another million barrels a day," Leggate told AFP.
The main fear for OPEC is that as the global slowdown bites, demand for crude will start to dwindle, bearing down on prices. Telltale signs have already been evident in the market, as crude prices tumbled below $26 a barrel last week, having spiked above $30 in the immediate aftermath of the September 11 events.
The OPEC oil cartel is "highly unlikely" to agree to increase crude production at a ministerial meeting in Vienna, the Middle East Economic Survey says in its Monday edition. "OPEC oil ministers believe there is enough oil being supplied and they are ready to move accordingly if there any shortages of demand spikes," the Cyprus-based newsletter said.
"It is highly unlikely that there will be any agreement during the meeting on an increase in production. Having said that, since early summer OPEC members have been mulling over the impact of the world economic slowdown and recession on oil demand later this year and into next year," the specialist weekly said.
OPEC is still wary after the bitter lesson of 1998, when it hungrily hiked production at exactly the time that demand evaporated amid the Asian financial crisis. Crude prices slumped below $10 a barrel, precipitating budget crises in some OPEC countries, most of which are heavily dependent on oil revenues.
"After the Asian financial crisis, they increased supply and they ended up with a glut which took years to restrain, so they are going to be very cautious about putting extra oil on the market when the demand scenario could be deteriorating anyway," said Lawrence Eagles, an oil expert with the GNI brokerage. "Unless prices rise sharply between now and then they probably won't do an awful lot," he told AFP.
Oil ministers are expected in Vienna from Monday onwards, though their exact time of arrival is being kept secret because of security precautions in Vienna. Normally, oil ministers hold a string of bilateral talks on the eve of the formal meeting and flag up the resolution well in advance.
Some have already hinted at the likely outcome this time. Secretary General Ali Rodriguez said OPEC wants a stable price between $22-$28 a barrel. Kuwait said the grouping would ensure there were no shortages on the market. No change in production or the price range would appear to be the favorite.
But different language may emerge from the grouping if the promised US military retaliation for September 11 gets into gear. "The danger is that you would get an upsurge in anti-US feeling in the Islamic world," said Eagles, warning of the outside chance of a petro-political stand-off between OPEC, with its Arab preponderance, and the oil consuming West.
Oil prices were Friday caught in a tug-of-war between concerns about the possible impact on supply and demand of US retaliation for the terror attacks on the United States. "The 11 September bombings did not clarify the supply/demand picture but made matters more murky," MEES noted.
Oil traded down on war fears on Friday. Brent North Sea crude for November delivery was changing hands for $25.79 a barrel, against $25.92 on Thursday evening. New York October-dated light sweet crude futures eased 37 cents to $26.36 a barrel. ― (AFP, London)
by Mark Rice-Oxley
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)