US President-elect George W Bush on 20 December said he was planning to open a dialogue with OPEC states in the hope of convincing them to increase production to avert a possible energy crisis in the US.
"One of the things we're going to have to do is to start up a strong diplomatic effort to work with our friends in the Middle East to have an energy policy that is respectful to their friends here and other democracies.
The quickest impact on the price of crude oil will be to work with OPEC nations, and to foster relations so that they may be convinced to open up the spigots to keep the pressure off prices."
On 18 December the president-elect told congressional leaders, according to his spokesman, Ari Fleischer, that "I'm not going to allow the working people of this country to suffer.
We must be concerned in this country about energy. We must be concerned about shortages and at the same time, obviously, concerned about preservation."
OPEC President Ali Rodriguez on 21 December gave a mixed response to Mr Bush's remarks.
"There are many is-sues we would like to discuss with Bush, now that he has made a positive announcement about possible agreements between OPEC and consumers - issues such as correcting the problem of speculation in the markets, the problems of refined products and transportation.
" But Mr Rodriguez rejected Mr Bush's call for OPEC to increase production.
"OPEC has already opened the spigots significantly this year and raised supply by nearly 4mn b/d. At the moment there is oversupply of oil and inventories have risen a lot."
Among a number of OPEC states there is a growing feeling that a decision to cut output may become necessary.
In remarks published by al-Watan on 20 December, Kuwaiti Oil Minister Shaikh Sa'ud Nasir al-Sabah said his country was sufficiently flexible in its attitude towards the need to adjust output appropriately in accordance with its interests.
But he hoped that OPEC members at their forthcoming 17 January extraordinary meeting would agree to cut pro-duction by 1mn b/d.
The previous day al-Rai al-'Am quoted Shaikh Sa'ud as saying it was "almost confirmed that there will be an agreement to reduce production if prices continue to decline with the same recent ratios.
There will be a withdrawal of around 1mn b/d if it is necessary, especially because the spring and summer seasons are ap-proaching, which mean the oil and fuel consumption will decline and the international demand on oil will be re-duced."
On the same day, Shaikh Sa'ud told the Kuwaiti News Agency (KUNA) that "there is a surplus in the market and there is no way to remove this surplus, which has a crucial role in pulling prices down, but to cut production."
Libya also favors a production cut if market circumstances do not change. According to MEES sources, Deputy Prime Minister 'Abd Allah al-Badri on 17 December sent a message to this effect to OPEC member states, adding that the organization should waste no time in being decisive.
Previous experience had shown, he said, that when OPEC had procrastinated before making production cuts the situation had been further aggravated.
Iran's OPEC Governor Hossein Kazempour on 18 December expressed a similar sentiment when he said that the organization would need to cut crude production by 1mn b/d "regardless of whether the price band mechanism is triggered or not. For the year 2000 the build will average 1mn b/d minimum."
Algerian Energy Minister Chakib Khelil said on 22 December that the OPEC January conference would see members cutting production by "much more than 500,000 b/d."
Among the OPEC states preferring to keep their options open at this stage are Saudi Arabia and the UAE.
A Saudi official was quoted by Platts on 21 December as saying the kingdom did not rule out an output cut, but "all possibili-ties are there.
However, it is still too early to decide the amount and timing." The official added that "many things can happen.
The price might go up." On 19 December, UAE Oil Minister 'Ubaid al-Nasiri, too, said "all options are open. We don't rule out any possibility of production cuts when we meet."
MEES learns that consultations among ministers about possible future action are already under way by telephone.
OPEC is determined to adhere to its price band agreement for controlling oil prices, under which combined output can be reduced if the OPEC Basket crude price remains below $22/B for 10 consecutive trading days or raised if it stays above $28/B for 20 consecutive trading days.
Because the Christmas holiday will close the New York and Lon-don petroleum exchanges for a number of days in late December and early January, the 10 trading days clause would come into effect just before the planned 17 January extraordinary meeting of OPEC ministers, if prices remain below $22/B during this period.
Whether or not OPEC might take action before the January meeting depends on how low crude prices fall in the meantime.
There are certainly precedents for OPEC deployment of the price mechanism without a formal meeting of ministers.
For example, in late October, OPEC triggered the price mechanism and raised combined production by 500,000 b/d beginning 1 November, following consultations which were conducted by telephone (MEES, 30 Octo-ber).
On the other hand, in mid-September, the OPEC basket price had been above $28/B for 20 trading days, yet the ministers decided to wait a further two days until a scheduled ministerial gathering before raising production (MEES, 18 September).
One of the main reasons behind the recent decline in crude prices was the continuing exit of speculators from crude oil markets.
This first became apparent earlier in the month, as the markets seemed suddenly to wake up to the fact that they were more than amply supplied with crude oil and non-specialist investment funds took this as a signal that the good times of high oil prices coupled with high uncertainty were over (MEES, 11 December).
The high uncer-tainty which still remains - about whether Iraq's supply disruption will continue into January and whether US heating fuel production and stocks will be sufficient to cope with continued cold weather - being now coupled with falling prices was a turn-off to most speculators.
The impetus for speculators to desert the oil markets was amplified by the even more recent drop in overall stock market values and growing fears of an economic recession in the US.
For speculators, the collapsing stock markets and the subsequent evaporation of potential profits created a need for li-quidity, accelerating the cashing in of oil positions to bolster up broader investment portfolios.
Last week's crude prices (see Table) reflected an unstable balance between bearish market fundamentals and uncer-tainty over OPEC's next move.
The withdrawal of speculators from the market was perhaps best demonstrated in the 20 December plunge in crude prices, which followed news from the US that stocks had again built the previous week.
That day the US Department of Energy (DoE) weekly report showed that US crude oil stocks rose 3.1mn bar-rels to 291.8mn barrels in the previous week.
This confirmed the American Petroleum Institute's (API) weekly stocks analysis of 19 December, which estimated that total petroleum stocks were 11mn barrels below this time last year, compared with a deficit of almost 100mn barrels in the summer.
Additionally, despite the recent cold weather, the DoE reported an increase of 900,000 barrels in middle distillate stocks, which include heating oil.
The API report showed a distillates stockdraw of 900,000 barrels, but this was accompanied by an upward revision of the previous week's distillate stocks by 1.8mn barrels, leaving inventories 15% below normal for this time of year compared with 17% in October.
Additionally, distillates stocks are expected to be boosted by imports, with reports of a large num-ber of distillates cargoes due into East Coast ports over the next month.
The recovery of prices later in the week was directly attributable to firming expectations of a cut in OPEC produc-tion in January of 500,000-1mn b/d.
On 21 December Mr Rodriguez - who will become Secretary-General on 1 January - said in a Venezuelan radio interview that OPEC would cut its crude production if prices continue to fall.
He added, "if these tendencies continue, like today when the OPEC basket dropped to the bottom of the ($22-28/B) target band, there is no doubt that OPEC would decide to cut production."
Mr Rodriguez' comment followed an OPEC News Agency report that the OPEC basket price had fallen to $22.26/B on 20 December. He added that there was not yet a consensus among OPEC members on the size of the likely cut.
Addressing continued OPEC concerns over benchmark price volatility, Mr Rodriguez announced on 18 December that Mexico would join with Russia and OPEC in studying the feasibility of developing a new crude oil benchmark.
Mr Rodriguez told reporters that "we are going to look for a benchmark that better reflects the reality of the mar-ket." He pointed out that OPEC, Russia and Mexico produced over 30mn b/d of oil, whereas the production of WTI and Brent amounts to just a small fraction of this figure.
He added that such a benchmark would help reduce speculation on oil prices, which currently adds $4-8/B to the price of oil; but he noted that other factors influencing prices included refining bottlenecks, high taxes in industrialized consumer nations and high transportation costs.
Mr Rodriguez announced in late November that OPEC was considering the introduction of a new benchmark, saying that it was absurd that WTI, Brent and Dubai crudes were used as benchmarks when they sold only 1mn b/d com-pared with OPEC's exports of 22mn b/d (MEES, 27 November).
(mees)
© 2000 Mena Report (www.menareport.com)
