New oil finds to expand Gulf reserves by 50%

Jan 28, 2003 01:00 AM

by Richard Dean

OPEC is trying to inject much-needed common sense into the oil market. What does it mean for prices in 2003? Thinking of opening a new hotel restaurant in Dubai? Better be thinking about what the oil price will be doing in six months time. Because if crude's selling for $ 10 a barrel come the summer, Saudi and Kuwaiti tourists will have other things on their plate than lobster thermidor.
Diversification is a wonderful thing. But let's not kid ourselves about what really drives the regional economy. So what signals must we look for in 2003? Clearly, Iraq dominates the headlines. But don't believe that the threat of battle is the only issue. An array of forces influence oil traders as they forge the world's oil prices on a day-to-day basis. From politics to petrol pumps, weather to war, the list of factors is near endless. Common sense, though, rarely features in this list of prime movers. Which is why December's meeting of the OPEC was so deeply uncharacteristic.

Since January 2002, the “OPEC 10” (the cartel's members minus Iraq) have been bound by the lowest production quotas for 10 years, allowing for combined oil production of 21.7 mm bpd. But they've been cheating. To the extent that in November, they produced some 3 mm bpd more than their self-imposed ceilings.
Clearly, this was a nonsense. OPEC's credibility, which had recovered in recent years, was wearing paper-thin. So the cartel, led as ever by Saudi Arabia, took a bold move when it met at its Vienna headquarters last month. It raised official quotas by 1.3 mm bpd in a bid to reflect the recent 'leakage', while simultaneously pledging to cut real output by roughly the same amount.
"Our decision is correct, looking at the current situation and the coming months," said Ali Al Naimi, Saudi Arabia's oil minister and OPEC's chief power broker. "It's called pro-activity."

It's also called common sense, and it sounds like a nice idea. But will it work? Kuwait's oil minister, Sheikh Ahmad Fahd al Ahmad al Sabah, says yes. "The oil price will average between $ 22 and $ 28 a barrel in the first half of next year if OPEC members comply with the new quotas," he said after the meeting. Others within the industry are sceptical that the cartel's members will indeed cut production. But giving them the benefit of the doubt, Sheikh Ahmad's forecast seems plausible.
Of course, a host of petroleum potholes could upset the applecart. War in Iraq, if it goes ahead, could spiral out of control, sending oil prices through the roof. If this happens, Saudi Arabia and the UAE -- and maybe even Kuwait if Iraq doesn't bomb it -- will make hay by stepping in to make up the Iraqi/Kuwaiti shortfall.

Alternatively, the global economy could grind to a halt. History suggests that if this happens, no amount of OPEC supply cuts will support oil prices, so a return to the bad old days of 1999 and $ 10/bbl could be on the cards. Or, as most forecasters deem likely, the price will remain within its current mid $ 20s environment, supported by modest global economic recovery and lukewarm OPEC supply restraint.
What does this mean for the regional economy? Gulf Business analysed these scenarios in detail last month (Gulf Business, December 2002, The Good, The Bad and the Ugly). But in a nutshell, war in Iraq may well be a blessing in disguise, while a period of stability would also be welcome. The impact of $ 10/bbl doesn't bear thinking about, but thankfully it seems unlikely.

For what it's worth, I am going with the consensus: A short term oil price spike in March when US troops strike at Iraq, followed by stability after the conflict reaches a swift conclusion. But this forecast is littered with more risks than at any point in recent years, so 2003 promises to be a uniquely turbulent time.

Source: Gulf Business
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