Sunday :: Dec 12, 2004

End Swell That Oil's Well

by pessimist

Bu$hCo is crwoing lately about how low gas prices are compared to earlier this year, which is supposed to support their contention that their economic policies are working. But the silver lining is separating at the seam:

Oil Prices Increase after OPEC Limits Surplus Production

Oil Ministers representing countries in the Organization of Petroleum Exporting Countries (OPEC) met in Cairo, Egypt, and agreed to end the over-quota production. The OPEC's decision "to end the over quota production," which reached one million barrels per day, caused an increase in oil prices at the international market. The barrel price of US light crude increased to $43 while Brent oil also saw an increase to $40.17.

Special note to muckdog:

Since August, OPEC has been producing one million more barrels a day of oil above the official quota of 27 million barrels a day in order to control oil prices.

Gee - just before the election. Has to be just a coincidence, right?

Even with the production increase, demands from consumer countries on the continuity of the quota surplus production were not accepted by OPEC members, who suffered $13 reduction in oil prices since their peak of $55 in October.

Don't rush out to the gas station and fill up just yet, however. It's going to take a while for the increase to hit the pump - unless the oil companies choose to 'pre-empt' any 'suprise' increase in their costs.

This decision to decrease production is not immediately effective because OPEC nations have not completed orders for January production. The decision will be effective in 40 days.

This gets Bu$hCo safely past the holidays, which would otherwise cause a great deal of hate and discontent if Granma couldn't see the kiddies because gas cost too much.

OPEC curbs oil output
Aim is to keep prices from falling further

OPEC served notice yesterday it intends to make money this winter - no matter how mild the weather might be. Meeting in Cairo, the 11-member cartel, which pumps about a third of the world's oil, said it will slash production by a million barrels a day to help ensure its product keeps moving through the winter. Scaling back output could push crude prices back toward the 21-year highs last reached in October, when many experts were predicting that $55-a-barrel oil would lift home heating oil prices 20% from last year.

Remember - I said that we would soon be reading about those too sick or elderly to afford heating oil and froze to death.

City residents spent an average of $1,000 to heat their homes last winter, when crude was trading at about $30 a barrel. So crude would have to return to that level from over $40 to avoid increases from last year.

"It had already leaked out that OPEC would cut back, so it's a matter of buying on rumor and selling on facts," said Alaron oil analyst Phil Flynn, who still believes that the OPEC move will build support for higher prices in the future. "I believe we could be headed back to $50, because I'm bullish on the economy," he added, noting that economic growth is still the key driver of oil prices regardless of how much tinkering OPEC does with production.

"Whether higher prices flow through to the consumer depends on the economy and how much pricing power companies have," said economist Stephen Stanley of Greenwich Capital.

The economy isn't doing as well as Bu$hCo would like, and do we REALLY need to remind people of the OPEC lessons of 1973 and 1979??

I didn't think so.

Half of this production cutback is coming from Uncle Bandar Bu$h'$ hometown:

Saudi Arabia to Cut Output by 500,000 Barrels a Day, Naimi Says

The oil minister for Saudi Arabia, OPEC's biggest oil producer, said the nation will reduce output by 500,000 barrels a day to enforce yesterday's accord. "The important thing is for the market to reach stability," Saudi Oil Minister Ali al-Naimi said today in Cairo.

OPEC hasn't met its self-enforced production quota since January 2001, and last month pumped 1.22 million barrels a day more than its quota. Abdullah bin Hamad al-Attiyah, Qatar's oil minister, said he is "concerned" by the price decline and that OPEC may cut output at its next meeting, in January. The Saudi minister, al-Naimi, said that drop was "profit taking."

To meet the accord, OPEC members excluding Iraq, Venezuela, Iran and Indonesia will each reduce output by 5 percent, said Fathi Shatwan, Libya's representative to OPEC. Libya will reduce by 80,000 barrels a day, he said. "Maybe it wasn't very clear to the market," he said. "You just take production for every country, and take 5 percent out of it" for the seven other OPEC nations.

The Saudi minister said oil markets are now well supplied. "The market, the pipeline, is full," al-Naimi said. "The tankers are full and they are heading to the market."

So what the Saudi Minister is saying is that this cutback has no reason to cause a price increase, at least not any time soon. Somehow, I expect that the wholesale price increase will magically appear at the pump no later than the first week of January - in pite of what industry doubters feel:

Agreeing to cut oil output meets some skepticism
OPEC to trim daily production by 1 million barrels, but traders take wait-and-see attitude.

Seeking to keep prices up without having them explode, OPEC agreed Friday to reduce its daily oil output by 1 million barrels a day -- and reserved the right to cut deeper early next year if crude turns much cheaper than now.

If effective, the output reduction would scale back output to 27 million barrels a day, the group's official production ceiling that OPEC has exceeded for months now because of the high demand. Benchmark U.S. crude futures have fallen by almost a quarter since the record prices of more than $55 a barrel in late October, as consuming nations have called on OPEC to keep output high to underpin economic recovery. The decline has been sharpest in the last week or so, spurred by increases in U.S. petroleum inventories, mild winter weather and little sign of a slowdown in OPEC output.

But traders said they are taking a wait-and-see attitude toward the pact, and sent oil prices sharply lower. Marshall Steeves, energy analyst at the New York-based brokerage Refco Group Inc., said traders are not taking OPEC's pledge to rein in production at face value. "You have to see if the proof is in the pudding," Steeves said, adding that it will be more than a month before the changes are felt in major consuming markets such as the United States.

OPEC's two other options -- doing nothing, and risking continued losses, or reducing the quota target and precipitating a new oil crisis -- were clearly not appealing to members.

Precipitating a new oil crisis would cause bad feelings with some of OPEC's other good customers - China and Japan, to name just two. OPEC has no interest in breaking what is already a very good cutomer relationship. Thus, the US escapes what could easily have become the new oil embargo, because business is going so well - for them.

This is why they can shrug off a short-term lack of typical price rise reaction:

OPEC ministers unfazed by oil price drop after output cut

OPEC ministers played down the significance of an indifferent market reaction to their output cut to shore-up sliding oil prices, insisting that prices would climb again next week.

World crude oil prices plummeted Friday as traders cast aside news of a modest OPEC production cut, betting that prices are now far too high as energy stockpiles expand. But Saudi Arabian Oil Minister Ali al-Nuaimi expressed confidence that OPEC's move would have the intended impact, saying that prices had dropped following the announcement of the cartel's decision because of speculation on the market.

The Organisation of Petroleum Exporting Countries left its official output quota of 27 million barrels per day (bpd) unchanged at a meeting in Cairo on Friday, but agreed to scale back surplus production to try to regain control of the market after pumping close to full capacity for months. Oil prices plunged in the wake of the decision by the 11-member cartel to trim back production by one million bpd from January 1 in a move aimed at halting a recent drop in crude prices from all-time highs above 55 dollars a barrel reached in October.

Nuaimi predicted on Saturday that oil prices would rise next week, playing down the significance of a sharp fall the day earlier. "Watch what happens on Monday," he said, adding: "I will tell you, it will go up on Monday."

Echoing Nuaimi's comments, Kuwaiti Energy Minister Sheikh Ahmad Fahd al-Sabah said of the drop in oil prices: "We were expecting this kind of reaction. Monday I think when the members start to cut their production the market will be more stable," he added.

However, he said that if crude prices keep falling OPEC should pare back its oil production ceiling at its next meeting on January 30. "If the price behavior continues as it is now or yesterday (Friday) from now to January, I think in January we'll have to cut the ceiling this time for about between 500,000 to a million," bpd, he told journalists.

Qatar's Energy Minister, Abdullah bin Hamad Al Attiyah, said he was optimistic that the cuts would have the desired effect. "I'm confident that our decision will be implemented by January 1. We will see that there will be a draw of more than one million barrels (of supply) off the market. Hopefully it (the market) will react positively," he said.

He agreed that a cut in quotas was possible at January's meeting. "We will meet and if we need it we will do it. I'm always worried about the second quarter. This is why we decided to meet at the end of the month."

'It's Not So Bad!' - 'experts'

Analysts shrugged off OPEC's decision and were sceptical that it would have much impact on the market. Analyst Jamal Qureshi the at Washington-based consultancy PFC Energy said here: "I think this was pretty much the middle of the road decision. They're not cutting back too much."

Societe Generale analyst Frederic Laserre said in a research note: "This decision looks like a logical compromise between those who do not want to change quotas, led by Saudi Arabia, and those who believe that the market now needs a strong signal by reducing quotas, even if by just a symbolic amount, led by Iran." He said that the cartel wanted to send a signal to the market after a rapid drop in prices since the peak in October. "Now that the rational exuberance is over, Saudi Arabia knows that OPEC will have to take control of the market again. However, it must not fall into the trap of taking control at an excessively high price that would be too difficult to defend, Laserre said.

So just what DOES OPEC want?

OPEC Expects Oil Prices to Recover as Cuts Are Made

OPEC, the producer of more than a third of the world's oil, expects prices will recover from their second-largest drop this year as members enforce their decision to lower output, ministers said. "Don't ask me about the oil price fall yesterday, it was nothing," Ali al-Naimi, the Saudi oil minister, told reporters in Cairo today. "The important thing is for the market to reach stability." Saudi Arabia has already told customers of a cut of 500,000 barrels a day, and not just of a low-grade crude called Arab Heavy, he said.

"A cut in quotas at the January meeting is inevitable if prices continue to fall," Kuwait's Sheikh Ahmad Fahd al-Sabah said today. A reduction of between 500,000 and 1 million barrels a day would be necessary, he said.

Qatar's minister, Abdullah bin Hamad al-Attiyah, today said he expects oil prices to rise after OPEC's cut begins Jan. 1. His Kuwaiti colleague said it won't take that long. "We were expecting this kind of reaction" in the oil market after the decision yesterday, al-Sabah said. "Monday, I think, when the members start to cut production, the market will be more stable."

Cut Allocations

To meet the accord, Saudi Arabia, Kuwait, the United Arab Emirates, Nigeria, Libya, Algeria and Qatar will each reduce output by 5 percent, said Fathi Shatwan, Libya's representative to OPEC. Iraq has no quota, and OPEC members Iran, Indonesia and Venezuela are at or below their current targets. The allocation of the cutbacks "wasn't very clear to the market," Shatwan said. "You just take production for every country, and take 5 percent out of it" for the seven nations. Libya is cutting 80,000 barrels a day, he said. Kuwait is reducing output by 120,000 barrels a day, he said yesterday.

Ministers have been deliberating proposals to increase their formal price target of $22 to $28 a barrel to $30 or more to compensate for a weakening dollar and inflation. The benchmark has been above that level for about a year and was last reported at $34.29 a barrel. Also, crude oil inventories in the U.S., the world's largest energy consumer, have risen for 11 consecutive weeks. "The market, the pipeline, is full," Saudi Arabia's al- Naimi said. "The tankers are full and they are heading to the market." The agreement made yesterday "will take time to show in the level of inventories."

OPEC is concerned that a weakening dollar is hurting the purchasing power of oil revenue. Iran wants the OPEC benchmark at $32 a barrel or more. Libya's delegate Shatwan said he is targeting at least $30 to $35 a barrel.

This would mean a sizeable increse in pump prices, assuming the maximum spread from $22 to $35 a barrel. Also assuming a parallel linear increase in retail prices, that's an increase of approximately 40% - or gas prices of at least $2.80 a gallon here in Southern California (based on our current average of about $2/gal. unleaded regular).

That isn't going to make George very popular with communters!

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pessimist :: 8:19 AM :: Comments (5) :: Digg It!