Oil exporters' bold gamble to lift prices
03:28 p.m Mar 14, 1999 Eastern
By Richard Mably
LONDON (Reuters) - Oil producers' bold new initiative to end a
year-long glut and restore sunken petroleum prices stands a much
better chance of success than initial oil market skepticism might
suggest, analysts said Sunday.
Major oil exporting countries who Friday announced sizable new
supply limits are counting on a swift rise in oil prices to make up for
the lost export volumes.
Analysts and traders said the gamble looked set to prove a winner --
even allowing for some leakage among the 10 OPEC and two
non-OPEC contributors to the deal.
''Compliance as always is the key. But with a reasonable level of
compliance I feel we will see a strong recovery in oil prices in the
second half of the year,'' analyst Mehdi Varzi at Dresdner Kleinwort
Benson said.
''They've gone for shock treatment,'' the head oil trader at a large
European oil company said. ''This will allow a draw in inventories
and bring Brent to $15 a barrel in two months time and perhaps even
to $18 by the end of the year.''
Oil company stocks, tied closely to crude prices, will also feel the
benefit.
Benchmark Brent crude Friday rose modestly after the deal was
announced, to $12.60 a barrel, still below last year's $13.34
average.
Immediate oil market reaction Friday was muted because the details
of individual countries' supply limitations were not announced by the
five nations that forged the agreement at a secret meeting in the
Hague, Netherlands.
But a joint statement made clear that the distribution among the 12
had been finalized and only needed to be ratified by a meeting of
Organization of Petroleum Exporting Countries on March 23.
Kuwait's Oil Minister Sheikh Saud al-Sabah said Saturday that the
agreed to package was for 2.029 million barrels per day of cuts for
10 OPEC members and non-OPEC Mexico and Oman. Norway is
expected to make an additional contribution.
Analysts and traders said the pact was likely to prove more effective
than two previous deals last year in Riyadh and Amsterdam that
aimed at curbs totaling 3.1 million bpd.
Poor compliance by big OPEC producers Iran and Venezuela and
rising supplies from sanctions-bound Iraq, exempt from the cuts,
spoiled the impact of those efforts.
''This deal seems to have addressed all three of those problems,''
broker Nauman Barakat of Prudential Bache in New York said. ''As
a result we should get better compliance and higher prices in the
second half of the year.''
Settlement in Iran's favor of a dispute over the baseline for Tehran's
previous output limit was likely to see tighter Iranian adherence to
the new curbs, Iranian oil specialist Varzi said.
Venezuela's new government has moved quickly to meet the
restrictions on supply made last year under the previous Caracas
administration and is seen as a reliable contributor to the new
limitations.
Caracas, having made the largest cut of all last year in percentage
terms, is believed to have made a smaller more realistic commitment
this time.
And Iraq, having expanded supplies quickly last year, will have
difficulty raising capacity further, industry experts said.
Meanwhile, low oil prices over the past year mean planned new
supplies from many producing countries have been put on hold.
With demand in the world's 75 million bpd market expected this year
to rise by about a million bpd, the large inventories that have forced
prices lower could quickly be removed.
''Assuming the cuts actually come in at about 1.5 million, there's no
doubt there'll be a large draw on stocks,'' Barakat said.
The Hague pact should also finally erase fears that Saudi Arabia,
easily the world's biggest oil exporter, has any intention of keeping
prices low in order to shut rival oilfields.
Saudi Arabia's new output cut, believed close to 600,000 bpd, will
take the kingdom well below the symbolic eight million barrels daily
production level it has held since the 1990-1991 Gulf crisis.
''Saudi Arabia's decision to go below eight million in itself is very
significant,'' a Saudi official said after Friday's deal. ''It shows that
like other countries we want higher oil prices.''
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