Asia needs a creative new way to reduce oil imports.
Monday March 15, 4:26 am Eastern Time
Asia faces new headache as oil prices set to
rise
By Neil Fullick
SINGAPORE, March 15 (Reuters) - If global oil exporters get their
way, net importer Asia will feel the bite of the highest crude prices in
more than 15 months, analysts said on Monday.
''For the oil importing countries of Asia, a sharp rise in the oil prices would be a significant
setback for economic recovery,'' John Russel, managing director of Bangkok-based Petroleum
Economics Ltd said.
The oil import bill would start to affect the balance of payments and slow down the pace of
deregulation in some countries which are trying to generate competition.
The only hope is that oil prices will rise slowly to reduce the impact on regional economies,
which are trying to emerge from 20 months of economic crisis.
Obvious gainers to a higher oil price would be major producers, like Malaysia and OPEC
member Indonesia.
Oil producers agreed in a meeting in The Hague on Friday to cut more than two million barrels
per day from production. That would represent around 2.6 percent on global supply of 75
million bpd.
The pact could jet prices to between $15 and $18 per barrel in coming months. Benchmark
Brent, which stands around $12.56 per barrel, has not traded above $18 since December 1997.
Oil prices have been muted to the deal so far, but analysts believe it could prove a turning point
for oil, which is languishing near 12-year price lows.
Saudi Arabian oil minister Ali al-Naimi, one of the major architects of the latest agreement,
believes world oil stocks would be back to normal by June and prices could rise $4 per barrel.
Some analysts are sceptical such quick price gains will result from the pact because of the huge
overhang in oil stocks. But they said the agreement could be the final measure needed to get oil
prices on a sustained recovery by the end of the year.
For Asia, which imports around 13 million barrels per day (bpd) of its 19 million bpd
consumption, it means higher import bills.
But with a few weeks before the start of the April-March fiscal year, governments have time to
juggle their budgets and accommodate a higher import price for oil.
During the slump in oil prices to 12-year lows in 1998, Asian economies did not particularly
gain because the benefit was offset by weaker currencies.
But a rising oil price could swing that balance to putting pressure on dollar expenditure because
currencies are far from recovering to pre-crisis levels.
''Clearly, it would be quite negative in terms of disrupting the process of stabilisation of
countries in the region. It could prolong the relative recession,'' Russel said.
In addition, it would set back marginal demand for oil, especially in deregulating countries
where competition is becoming increasingly price sensitive.
For net oil exporter Indonesia, Asia's only member of OPEC, a much higher oil price would add
significantly to the government's coffers at a time when it is struggling to shake off recession and
a sunken currency.
The government has budgetted oil prices at just $10.50 per barrel for the year starting April 1,
down from $13 in the current fiscal year ending March 31.
In February, the government's average sales price for its crudes was 10.69 per barrel.
Oil minister Kuntoro Mangkusubroto said earlier on Monday that the government had not yet
decided whether to commit any of its crude production, which analysts estimate at 1.36 million
bpd, to the latest round of cuts. OPEC meets next week in Vienna.
''All options are open,'' he told reporters.
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Monday March 15, 12:37 pm Eastern Time
Saudi leads oil pact with 585,000 bpd
cut-sources
(Updates with Norwegian announcement of cuts)
LONDON, March 15 (Reuters) - Saudi Arabia is spearheading a
price rescue pact with a whopping 585,000 barrels per day (bpd) cut
that will take its OPEC output quota well below a cherished level of
eight million bpd, delegates said on Monday.
The kingdom's quota will fall to 7.438 million bpd from April 1, breaching the eight
million-plus bpd quota it has enjoyed for almost all of this decade, they said.
The sacrifice by the world's biggest producer will earn rewards in terms of price rises because
it is a strong signal of Riyadh's determination to help drain global oversupply, Saudi officials
say.
Saudi Arabia agreed to the cut under the terms of an accord reached at secret talks in The Hague
on Friday that embraces 10 OPEC and non-OPEC Mexico, Oman and Norway.
The accord stipulates cuts of 2.004 million bpd, representing about a 7.3 percent reduction in
supply for all producers except Venezuela, Mexico, Oman and Norway.
It details a 125,000 bpd cut from both Venezuela and Mexico, reductions of 4.4 percent and
about 3.6 percent respectively.
Under the pact Nigeria would cut supply by 148,000 bpd, the United Arab Emirates would
reduce by 157,000 bpd, Libya 96,000 bpd and Indonesia 93,000 bpd, the delegates said.
It stipulates an Iranian cut of 264,000 bpd, they said.
Exact output reductions for Algeria and Oman were not immediately available. However,
assuming a 7.3 percent curb, Algeria would reduce by 58,000 bpd.
The pact, orchestrated by the oil ministers of Saudi Arabia, Iran, Algeria and non-OPEC, will
be formalised at a ministerial meeting of the Organisation of the Petroleum Exporting Countries
in Vienna next week.
Norway said it would cut output by 100,000 bpd, provided OPEC confirms the new cuts in
Vienna.
The agreement brings total output cuts pledged in three rounds of reductions agreed over the past
12 months to about 5.1 million bpd to try to mop up a glut caused by Asian economic decline
and rising Iraqi output.
Saudi Arabia increased its output to above eight million bpd in 1990 to help make up for the
loss of Iraqi and Kuwaiti output during Iraq's seven-month occupation of Kuwait.
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Monday March 15, 2:30 pm Eastern Time
Venezuelan oil unions will respect cut
decision
CARACAS, March 15 (Reuters) - Venezuelan oil unions will respect
the government's decision to cut another 125,000 barrels per day
(bpd) of oil production although it is opposed to the policy, senior
unionists said Monday.
Energy and Mines Minister Ali Rodriguez approved the deeper cut
after a meeting with other petroleum-producing states in The Netherlands, where 13 countries
agreed to remove more than two million bpd from world crude markets.
Asked if the union planned a strike to oppose the cuts, Aliceto Perez, executive secretary of the
main oil union Fedepetrol, told Reuters:
''We are not talking about anything like that. This is a decision of the state and we have to
respect it.''
The latest cut, which has still not been announced officially by the Venezuelan government,
comes on top of a 525,000-bpd reduction approved last year.
Fedepetrol has been complaining bitterly about the impact of the cuts on jobs in the sector. And
in January, the union introduced a formal strike petition to the Labor Ministry, which was never
followed through.
Union power has been substantially reduced since President Hugo Chavez took office last month
because he has denounced many as corrupt. The issue is under investigation by a congressional
committee.
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Monday March 15, 2:48 pm Eastern Time
(Note: this article is ''in progress''; there will likely be an update
soon.)
FOCUS-Norway to double oil cuts to
200,000 bpd
(Recasts, updates with quotes, background)
OSLO, March 15 (Reuters) - Norway said on Monday it would
double its cuts in oil production to 200,000 barrels per day (bpd)
until the end of 1999 on condition that other producers kept promises to curb output to bolster
prices.
''A condition is that OPEC carries out the reductions they have agreed,'' Oil and Energy
Minister Marit Arnstad said, referring to a pact reached on Friday among major OPEC and
non-OPEC producers to curb output.
''I have good reasons to believe that OPEC will formalise the cuts,'' she said, adding Norway
would review its decision if OPEC failed to push through the cuts at a meeting in Vienna next
week.
Norway planned to make the new cuts of 100,000 bpd from April 1, on top of 100,000 bpd
already in place since last year. The total 200,000 cuts would run until the end of 1999.
Norway produces about 3.0 million bpd and is among the world's top exporters behind Saudi
Arabia. The original 100,000 bpd cuts had been due to run to the end of June 1999.
''The cuts are a contribution from Norway since other oil producing countries now seem to be
making contributions,'' Prime Minister Kjell Magne Bondevik told a news conference.
''We found that that it was right in a spirit of solidarity to get the oil price up and first and
foremost to stabilise the oil price,'' he said, adding that a more stable oil price would ''in itself
have a stabilising effect on the Norwegian economy.''
The Oil and Energy Ministry said it was not clear if OPEC and other major producers which
met on Friday in The Netherlands had included a Norwegian cut into their announcement that
producers were cutting more than 2.0 million bpd.
Norway did not take part in the meeting of major producers led by Saudi Arabia.
''We are making these decisions unilaterally,'' ministry spokeswoman Sissel Edvardsen said,
adding that Norway had had ''bilateral discussions with other producers as we always do.''
''I cannot speculate on whether they included our cuts.''
Bondevik said a big parliamentary majority backed the cuts. The minority centrist government
has just 42 of 165 seats in parliament and needs opposition backing for its initiatives.
Carl Hagen, leader of Progress Party and member of parliament's foreign affairs committee
which discussed the cuts on Monday, said he opposed the deal. His group, with 25 seats, was
the only group against the cuts.
''We do not believe it is sensible for Norway in a long-term perspective to form a close
cooperation with OPEC countries,'' he told Reuters. ''We are following the same principles as
Britain and the Unites States''
(Note: this article is ''in progress''; there will likely be an update soon.)
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Monday March 15, 3:29 pm Eastern Time
ANALYSIS-Oil faces long fight against
stock flab
By Andrew Mitchell
LONDON, March 15 (Reuters) - Oil markets will take the rest of the
year to work off their huge cushion of spare oil even if key producers
stick to a tough new restraint regime agreed last week, analysts said
on Monday.
A worldwide inventory overhang estimated anywhere between 250 million and 500 million
barrels will stop revenue-starved producers reaping quick price rewards from their deal to
slice two million barrels from daily oil supply.
''We've kept our view that producers needed a cut from actual production of 1 to 1.5 million
barrels per day (bpd) to rebalance the market by the end of the year,'' said Mike Barry of
London's Energy Market Consultants (EMC).
Analysts expect producers to make good on around 70 percent of the cuts, with 1.2 million bpd
of curbs from the Middle East seen as the bedrock.
''The big draw will only come in the fourth quarter,'' added Roger Diwan of Petroleum Finance
Company (PFC).
The scale of the task facing producers amid disappointing world demand growth stalled an
initial oil price recovery soon after the deal was announced on Friday.
Brent crude on Monday at $12.60 a barrel was still valued below last year's 22-year low of
$13.30.
While stocks in industrialised countries have eased a little in recent months, there is still four or
five more days more inventory cover for the 75 million bpd world market than EMC estimates
as an operational norm.
The bulk of spare supply heading traditionally weak second quarter demand has weighed
particularly heavily on prices. Heating oil supplies are still at levels normally amassed in
readiness for peak winter consumption.
A 300,000 bpd fall in crude and product inventories now likely over the second and third
quarters should accelerate into a two million bpd total stock slide in the last three months of the
year, Washington's PFC said.
''But the question then becomes whether they can keep the cuts going,'' Diwan added. ''It's
easier to maintain in the short-term when prices are low than further out when there will be
more of a temptation to cheat.''
Release of pent-up supply from storage tanks to fill spaces made by the producer cuts also
means any price recovery could soon face a relapse.
''Over the last few months it looks like there's been a lot of non-traditional storers in
non-traditional systems -- the kind of places that don't even show up in normal data,'' said David
Knapp of the International Energy Agency (IEA).
As oil traders rush to get rid of these 'hidden barrels' prompt prices could dip to enough of a
discount to forward values to stop bigger companies running down stocks.
''The speculative barrels could be the first to go. This will probably hit front end prices and
stop OECD stock numbers falling for a bit,'' said the IEA's Knapp.
The producer deal could briefly work against itself as perceptions of firmer prices to come
strengthen forward prices against near-term values and draw oil into storage, the analysts said.
Only when the prompt market starts to tighten will producers feel the full benefit.
''The market probably needs that time to adjust,'' said Knapp. ''First you've got to get supply
back in line with demand, then reduce the hidden barrels outside the big consumers. Then you
can attack the OECD stocks.''
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Economist Questions OPEC Resolve - (WACO) -- Some oil analysts expect Organization of
Petroleum Exporting Countries members will comply with an agreement to cut production in
order to raise prices. But a leading Texas economist has his doubts. Texas economist Ray
Perryman says OPEC now controls less of the world's oil production than it did 25 years ago...
and members have a history of violating production-cutting agreements when they are not in
their own interest. He sees prices rising when beleaguered economies in Asia and South
American rebound.
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Monday March 15, 5:56 pm Eastern Time
FOCUS-Oil up modestly as dealers ponder
output pact
(Updates prices para two, table)
By William Maclean
LONDON, March 15 (Reuters) - Oil prices rose gently on Monday as
dealers digested an accord among major producing countries aimed at
draining the glut on world markets.
International benchmark Brent crude was 13 cents higher at $12.70 a barrel, after posting a 42
cent gain on Friday after the deal orchestrated in The Hague by Saudi Arabia, Iran, Algeria,
Venezuela and Mexico.
As details of the exact allocations under the two million barrel-a-day output pact emerged,
markets remained muted for fear that poor compliance would ruin the deal.
OPEC delegates told Reuters that Saudi Arabia, with 585,000 barrels a day (bpd), had pledged
the largest contribution to a package of cuts shared between 10 OPEC and three non-OPEC
states.
The Organisation of the Petroleum Exporting Countries meets on March 23 to ratify the deal
which is the third effort in a year by producers to rebalance oil markets.
Norway confirmed it was reducing by an extra 100,000 bpd while fellow non-OPEC exporter
Mexico and OPEC's Venezuela were said by delegates to have pledged 125,000 bpd of cuts
apiece.
Other OPEC members promised to curb supply by just over seven percent.
The agreement, which excludes sanctions-bound Iraq, stipulates reductions of 2.004 million
bpd.
That brings total output cuts pledged in three rounds of reductions agreed over the past 12
months to nearly five million bpd to mop up the glut caused by Asian economic decline and
rising Iraqi output.
Dealers said it will take several more weeks before the market sees firm evidence of the
reductions.
Producers' performance will come under scrutiny from traders familiar with cheating by cartel
members.
''It is all about compliance and we will have to see how that maps out,'' said a commentary by
London brokers GNI.
Former Saudi oil minister Sheikh Zaki Yamani predicted that prices would climb to over $15 a
barrel by the end of the year if OPEC members comply with the reductions.
''We'll see much higher prices than $15 a barrel by the year-end if OPEC complies with the
cuts,'' said Yamani. ''By the year end, the massive overhang will decline and prices will rise.''
Prices in dollars per barrel:
Mar 15 Mar 12
(close) (close)
IPE May Brent $12.70 $12.56
NYMEX April light crude $14.45 $14.49
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Monday March 15, 6:31 pm Eastern Time
Oil cuts a good deal for Venezuela, analysts
say
By Tom Ashby
CARACAS, March 15 (Reuters) - Last week's agreement by major
petroleum producers to remove another chunk of excess oil from
world markets bodes well for Venezuela, whose share of the cut is
smaller than any other OPEC member, analysts said Monday.
But even the cut of 125,000 barrels per day (bpd) that Venezuela agreed to will be a painful
sacrifice for a country that is already sinking into recession and suffering thousands of job
losses.
And it still leaves oil policy in limbo between the government's promised cuts on the one hand,
and growing private-sector output on the other.
Venezuela went into last week's talks in The Netherlands insisting that other producers shoulder
the lion's share of any more reductions, having made the biggest commitment to trim production
in previous rounds in 1998.
''The Saudis had to drag the Venezuelans to the negotiating table,'' said Roger Diwan, analyst at
Petroleum Finance Corp. in Boston.
''I think it was basically a deal between Persian Gulf producers and they needed some cover
from Mexico and Venezuela,'' he added.
Delegates at the talks said all 10 members of the Organization of Petroleum Exporting Countries
(OPEC), excluding Iraq, agreed to a 7.3 percent cut, while Venezuela signed up for just 4.4
percent.
The agreement forged last week at The Hague in The Netherlands stipulates total crude-supply
reductions of 2.004 million bpd.
Venezuela's total percentage cut, including last year's commitment, is still the cartel's highest at
19.3 percent. Saudi Arabia has pledged a 15 percent reduction since February and Iran has
promised a 14.5 percent cut.
Venezuelan officials declined to confirm how much their country had pledged to cut at The
Netherlands talks. Energy and Mines Minister Ali Rodriguez said that Venezuela was in full
compliance with its existing OPEC quota -- for the first time in years.
''What is interesting is that even though President (Hugo) Chavez has said he will go back in
line with OPEC, and he has held up his campaign promises fully, Venezuela is not a leader here
in terms of OPEC cuts,'' said Daniel Barcelo, oil analyst at Commerzbank in New York.
But even a modest compliance level with the latest deal would have a significant positive
impact on oil prices, Petroleum Finance Corp.'s Diwan said.
''Let's imagine we are going to have 1.3 (million) to 1.5 million barrels per day cut, and I
imagine Venezuela will cut 50,000 to 75,000 barrels'' per day, Diwan said. ''That's a good deal.
Oil prices are going to go up.''
Crude oil prices have already risen by more than $2 per barrel, or 20 percent, since the
beginning of March on hopes that producers would face up to the problem.
''Higher oil prices are a great deal for Venezuela,'' said Barcelo.
But Diwan and Barcelo concurred that the cuts would not solve Venezuela's structural problem
of how to deal with rising output from the private sector.
Private-sector oil production in Venezuela is expected to grow by 100,000 bpd this year to
about 500,000 bpd as some big projects, including extra-heavy oil from multibillion-dollar
projects in the Orinoco region, come on stream. Venezuela's partners on the Orinoco projects
include leading U.S. and European companies, such as Conoco Inc. of Houston, Texas, and
France's Total SA.
To comply with The Netherlands deal, Venezuela's state oil company will have to cut steadily
more of its own production to compensate for the private sector's growth.
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