Oil prices rise as OPEC sees in the New Year with output cut

Dec. 28, 2001
Oil futures prices immediately jumped in London as the Organization of Petroleum Exporting Countries agreed Friday to reduce production quotas by 1.5 million b/d for the next 6 months.

LONDON, Dec. 28 -- Oil futures prices immediately jumped in London as the Organization of Petroleum Exporting Countries agreed Friday to reduce production quotas by 1.5 million b/d for the next 6 months.

Prices for North Sea Brent crude rose 49¢ to $20.83/bbl on the International Petroleum Exchange before trading dampened down to $20.75/bbl.

The February contract for benchmark US sweet, light crudes gained 25¢, or 1.2%, to $21.15/bbl in electronic trading on the New York Mercantile Exchange.

Oil prices are still at the lowest level since 1998. However, most traders apparently accept that the new OPEC quotas will be enforced. Coupled with oil supply reductions promised by nonmember producers and a rise in demand during the coming winter months, that should help firm market fundamentals.

The agreement reached in Cairo means that OPEC, with a 60% share of the world oil export market, will reduce production by 6.5% starting Tuesday.

However, some industry observers are skeptical that the new agreement will reduce supplies enough to lift prices back to this year's average of around $25/bbl, partly because OPEC has cheated on earlier supply targets. The 10 OPEC members who participate in quotas overshot them by 450,000 b/d in November. Sticking to the newest quotas would mean they would have to shut in 25% of their normal production.

Russia, Norway, Mexico, Oman, and Angola have also pledged production or export reductions totaling 462,500 b/d. OPEC, which produces 30% of the world's oil, initially stipulated that non-OPEC producers had to reduce oil output by 500,000 b/d before it would again roll back its production quotas.

OPEC ministers finally decided to take action at an emergency meeting in Cairo, their record seventh gathering in a year, surpassing 1974 when the group was coordinating an oil boycott after the 1973 Arab-Israeli War. Most members of the cartel were in Cairo for a meeting of the Organization of Arab Petroleum Exporting Countries and will assemble at official OPEC ministerial level again in March in Vienna to review the effects of their decision.

The Saudi oil minister, Ali I. Naimi, said, "We will do what we have to do to bolster prices. What is important right now is to stabilize the market, match supply and demand, avoid an unnecessary buildup of inventories and hopefully lead to economic growth."

Alí Rodríguez Araque, OPEC secretary general, said oil ministers from inside and outside the group plan to meet in Moscow next month to discuss their accord, which has added to speculation that Russia is not wholly committed to making cuts.

AO Yukos Oil Co., Russia's second largest oil producer, said last week it plans to increase 2002 output by 24% and boost spending by a third on production, refining, and marketing.

Russia marked the OPEC decision by sending its first export cargo from its new oil terminal on the Baltic at the port of Primorsk, the terminus of the 455 km Baltic Pipeline System (BPS), which was begun in March 2000. Up to 12 million tonnes/year of oil are to be pumped through it, including oil from Kazakhstan.

The Primorsk terminal was built to replace the major oil export port Russia lost with the 1991 Soviet collapse, which left the Latvian port of Ventspils outside its borders. The terminal will provide a direct route to oil customers in northern Europe and will cut Russia's dependence on transit routes through Estonia, Latvia, and Lithuania.

Use of the BPS should bring the Russian government $100 million/year and allow savings of to $1.5 billion each year in transit tariffs. The capacity will be increased to 18 million tonnes/year after completion of the second, $800 million stretch of the pipeline over the next decade, which will bring the total route to 2,700 km. The pipeline will transport oil from the Timan Pechora region in the Arctic North to Primorsk, about 160 km north of St. Petersburg.

After Friday's meeting Rodríguez said, "The main objective of this cut is to stop the fall in prices. The principal factor affecting prices is the world economy. Then there is the oversupply of oil, which we want to correct."

Iraq is not part of the OPEC quota system, since its exports are controlled by the United Nations under the oil-for-aid program.