Price fluctuations call OPEC's attention to Russia

Nov 20, 2001 01:00 AM

by Charles Coe

OPEC is taking Russia's growing importance as an oil producer and exporter very seriously. OPEC ministers announced that they would cut production by a further 1.5 mm bpd, effective January 1, 2002, subject to the firm commitment by non-OPEC producers to reduce their output volumes by 500,000 bpd simultaneously.
The oil group is paying particular attention to Russia, which is producing around 7 mm bpd and putting roughly 4 mm bpd of that on the world market. Prior to OPEC's ministerial meeting in Vienna, Russia offered to make a symbolic production cut of 30,000 bpd, an amount that OPEC considers paltry.
During the OPEC meeting in Vienna, Saudi Oil Minister Ali al-Naimi was quoted as saying: "Thirty thousand barrels out of 7 mm? That disappoints anybody. The Russians know that. Don't worry about Mexico, Norway, Oman or Angola. This is about Russia."

At its current rate of production, Russia is drawing close to OPEC leader Saudi Arabia's daily output of 7.5 mm barrels. Furthermore, Russian exports are expected to increase by 400,000 bpd in 2002 even though growth in world demand next year is expected to be minimal -- probably less than 1 mm bpd. The events of September 11 and the global economic downturn have sharply reduced the world's demand for crude, resulting in a steady drop in prices by as much as 25 % over the last two months.
Non-OPEC Mexico and Oman have agreed to reduce output by about 150,000 bpd between them, and OPEC would like to Russian and Norway to cut production by around 350,000 bpd -- with Russia accounting for the lion's share of the reduction. "I believe that Russia's position is extremely unreasonable," Mr. Naimi told, stressing that point that OPEC is facing a crisis.
But the initial Russian reaction to OPEC's position failed to suggest that Moscow would heed the group's bidding. "We are not going to at any time reduce production on a big scale -- it's impossible," Russian Prime Minister Mikhail Kasyanov said in Madrid during a state visit to Spain. "Perhaps we could cut some production for some time to achieve a fair price," he added. But he also pointed out that Russia was not a member of OPEC and would determine its own oil policy in line with its own interests.

But maintaining oil prices in the $ 20-25 per barrel range is in Russia's interest. The country's earnings from its oil exports are its main source of financing its foreign debt. And if prices should fall below $ 15 per barrel, investment in Russian crude development would be adversely affected.
Responding to OPEC's urging that Russia cut output, Vagit Alekperov, the president of Russia's largest oil company LUKoil, acknowledged that a reduction in output by Russian companies would be in their best interest. He suggested that LUKoil could cover as much as 20 % of an overall production cut by Russian oil firms. LUKoil produces around 1.5 mm bpd.
The Soviet Union produced more than 11 mm bpd during the late 1980s, but by the mid-1990s Russian production stood at a little over 6 mm bpd. However, the country's 1998 financial crisis worked in its oil industry's favour, with the devaluation of the rouble making development of the petroleum sector highly profitable. By 2005, Russian crude production is slated to rise to as much as 7.8 mm bpd. Furthermore, oil exports from the Caspian Sea region -- once part of the Soviet Union -- are projected to rise to more than 3 mm bpd by 2010, further cause for concern to OPEC.

OPEC's position is that some 2 mm bpd of crude needs to be removed from the market in order to bring the price of the OPEC basket back up to within the group's preferred range of $ 22-28 per barrel range. The OPEC basket price is now under $ 17 per barrel. According to the plan that the cartel has been working with, when the basket falls below $ 22 per barrel for more than 10 days, the group is to cut output by 500,000 bpd. The basket has been below its minimum price for more than a month.
During October, OPEC countries produced 23.94 mm bpd, some 700,000 bpd above the self-imposed quota total of 23.2 mm bpd that became effective on September 1. Since the start of 2001, OPEC members (not including Iraq) have cut production by 3.5 mm bpd. Their proposal to remove another 2 mm bpd from the market would mean that global oil production has been curtailed by 5.5 mm bpd in the course of a year.
However, Saudi Oil Minister Naimi was adamant that this time OPEC would not cut production on its own. Yet he stressed that the present condition of the oil market called for the cooperation of both OPEC and non-OPEC producers.

With OPEC refusing to make further production cuts without a commitment from non-members to follow suit, analysts have been left to conclude that a price war and a battle for market share might be on the way. Should such a war ensue, the price of crude might drop to $ 10 per barrel -- or lower.
OPEC denies that it is threatening a price war, but instead insists that it is looking for help in addressing the issues of declining demand and subsequent falling prices. "They share the benefits, so why can't they share the burden?" Nigerian Oil Minister Rilwanu Lukman asked of non-OPEC states during the Vienna conference.
Meanwhile, OPEC's President Chakib Khelil said: "Do you think that if we wanted to put pressure (on non-OPEC members) that we would use this approach? Wouldn't it be easier just to produce more?"

Source: NewsBase
Alexander's Commentary

Change of face - change of phase

In the period of July 20 till August 3, 2015, Alexander will be out of the office and the site will not or only irreg

read more ...
« September 2020 »
September
MoTuWeThFrSaSu
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30

Register to announce Your Event

View All Events