Stakes are high for next OPEC meeting

Sep 24, 2001 02:00 AM

Terror attacks on the United States together with fears of a dramatic slowdown in the global economy create a backdrop of uncommon urgency for OPEC oil ministers meeting to review their crude production quotas. As suppliers of almost 40 % of the world's oil, members of OPEC have the power to help shore up the buckling global economy -- or speed its descent into recession.
Stakes are high for the meeting in Vienna, Austria -- a meeting some OPEC delegates and energy analysts had earlier envisioned as little more than a ritual of kaffeeklatches in four-star hotels followed by the customary rubber-stamping session at OPEC headquarters.
In the wake of the Sept. 11 attacks on New York and Washington, some analysts believe OPEC members might discuss reversing this month's cut in output of 1 mm bpd -- though the cartel is likely just to renew its existing quotas. "OPEC doesn't need to do anything. What OPEC should avoid doing now is to cut production to get prices back up again. If they did, they would make a recession worse," said Leo Drollas, chief economist of the Centre for Global Energy Studies in London.

OPEC has a production target of 23.2 mm bpd, after having slashed its official production this year by a total of 3.5 mm bpd in an effort to keep prices firm. In the wake of this month's terror attacks, the United States, the world's most voracious oil importer, is leaning on OPEC to keep prices and supplies stable.
Energy Secretary Spencer Abraham met in Vienna with OPEC Secretary-general Ali Rodriguez to convey President Bush's hope that the group would take no action that would drive up prices or threaten supplies should the United States retaliate for the terrorist attacks.
Within hours of those attacks, Rodriguez had declared that all OPEC member countries were committed to "continuing their policy of strengthening market stability and ensuring that sufficient supplies are available to satisfy market needs." He "categorically refuted" the idea that some OPEC members might try to use their oil exports as an economic weapon.

Some observers have suggested that Iraq or Iran -- OPEC members and long-time adversaries of the United States -- might try to withhold exports to the West if the US-led coalition attacks targets in Afghanistan, where Osama bin Laden, the main suspect in this month's terror attacks, was believed to be hiding. Drollas said he foresaw no such supply risk, so long as any fighting was contained within Afghanistan.
"If it boils over into Iraq or Iran then that might create a supply problem," he said. Oil prices spiked to more than $ 31 a barrel after hijacked airliners ploughed into the World Trade Centre and Pentagon. Prices eased later, as concerns about shrivelling corporate profits and massive job cuts foretold a drop in demand for oil.
Front-month futures contracts of Europe's benchmark crude, North Sea Brent, were trading at $ 25.72 a barrel, down 17.2 % from a Sept. 11 high of $ 31.05. Contracts of light, sweet crude for November delivery traded at $ 26.40 on the New York Mercantile Exchange, which closed immediately after the attacks on the World Trade Centre.

OPEC's own benchmark -- the average price for a so-called basket of seven crudes -- was $ 24.51 a barrel, the most recent day for which the group compiled information. Demand for crude typically intensifies in the autumn, as refiners in the northern hemisphere stock up to produce heating oil for winter.
"We were originally thinking that OPEC might raise production out of concern for the global economy. However, Saudi Arabia has recently said that they might not need to if demand falls like it appears to be doing," said Jay Saunders, an energy analyst with Deutsche Bank in Baltimore, Maryland.
Saudi Arabia, OPEC's biggest and most influential producer, pumped nearly 7.9 mm bpd in August, according to the Paris-based International Energy Agency. Saudi Arabia also has more than 2.9 mm bpd in spare production capacity, more than all the other OPEC members combined, the IEA said.
Peter Gignoux, head of the petroleum desk at Salomon Smith Barney in London, noted that Saudi Arabian Oil Minister Ali Naimi recently reassured markets that his country would help ensure adequate supplies of crude. However, both Naimi and Rodriguez stopped short of pledging to boost production at a meeting. Like their colleagues, they are haunted by the consequences of OPEC's decision in December 1997 to increase production -- just prior to a financial crisis in Asia that sent oil prices plummeting a year later to $ 10 a barrel.

The risk this time around is that demand could collapse in most major markets including the United States and Europe, dragging prices down with it. OPEC members don't have the option of curtailing output to try to buoy prices at a time of sagging demand, Gignoux said.
"I would counsel that they follow one of the proverbs that traders use: Listen to what the markets are telling you," he said. With prices sliding past OPEC's preferred basket price of $ 25 a barrel, Gignoux suggested itmight be time for OPEC to rethink its pricing targets altogether. "A review of higher oil prices," he said, "is clearly within OPEC's remit."

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