Tuesday, March 23, 1999 Published at 12:21 GMT
Opec slashes oil production
Oil producers finally agree to restrict output
Ministers from oil producing countries have
agreed to deep cuts in production to bolster
depressed oil prices.
The members of the
Organisation of Petroleum
Exporting Countries (Opec) and
others meeting in Vienna have
agreed to a reduction in output
of 2.1m barrels a day until April
next year.
Cuts among Opec nations will amount to 1.7m
while non-Opec producers like Mexico, Norway,
Russia and Oman have committed to additional
cuts of almost 400,000 barrels a day.
Libyan Oil Minister Abdullah Salem al-Badri
said after the meeting: "Yes we have signed.
We are happy, we have been asking for this for
more than a year."
The ministers said the
cuts are designed to lift
the oil price to $17 a
barrel by the end of
1999. Over the last year
oil prices have been
languishing at a 12-year
low, dropping to $9.55 a
barrel.
The low prices have
sharply cut the cash-flow
of many oil-producing
countries, damaging
their debt-burdened economies. Sharp
production cuts would drive up prices and
revenue.
Inflation fears
However, this would hit consumers hard. There
are fears that oil prices will rise steeply,
rekindling inflation. As a result long-term
interest rates have already been pushed up
sharply in London and New York.
The oil price has increased 30% in the last
month on the belief that Opec would finally
agree to cap output. Oil has risen from its low in
December of below $10 a barrel, for Brent
crude for May delivery, to $13.75 as the
decision was announced.
City traders believe that any sustained increase
in oil, the most important traded commodity, will
put a damper on hopes for a subdued inflation
outlook.
"Oil prices have firmed up and that could take a
further toll on the US bond market. Some
people have put low inflation down solely to
cheap energy prices," said Gerard Lyons of
DKB International.
Plan to beat the oil glut
Oil producing countries have been hurt as oil
prices dropped to a thirty year low with a glut of
crude oil flooding the market. Oil revenues were
down 30%, or $50bn, for Opec countries in
1998.
Weak demand, especially in Asia after last
year's financial crisis, has also hurt the oil
producers.
Now Opec is confident that it has a deal that will
stick to cut oil production substantially. "Prices
will rise when the market feels the cuts," said a
Gulf State official in Vienna.
The deal was agreed in principle in the
Netherlands last week, with the world's biggest
oil exporter, Saudi Arabia, taking the lead.
Inflation-busting rise
If OPEC achieves its objective of nearly
doubling the oil price, it could damage the fight
against inflation.
The dramatic fall in inflation in the last year
across nearly all the industrialised countries has
been helped by the weakness in world
commodity prices, led by oil.
If the increase in the oil price is sustained, it
could push up many prices, making it harder for
central banks to cut interest rates.
February inflation figures out on Tuesday
showed the UK government undershooting its
inflation target of an underlying rate of 2.5% -
but Budget increases of 0.4% are already in the
pipeline for March.
"It is a factor and it is certainly something to
watch. The Monetary Policy Committee will
weigh the rise in oil prices against the strength
of sterling," commented Michael Saunders of
Salomon Smith Barney.
Policing a deal
The history of the Opec cartel has been a
volatile one over the last thirty years with
members finding it hard to strike agreements
and stick to them for their collective benefit.
The problem for Opec has always been how to
police any deal to cut oil production to prevent
cheating by its more economically vulnerable
members.
Last year's planned 3m bpd production cut was
believed to be widely ignored, especially by
Latin American and African producers faced
with a worsening economic crisis.
But this time Opec says there will be no
slackers.
"There are no fears this time about compliance.
Every country is willing to comply fully. They
have seen the consequences when they do
otherwise," said a Gulf state official.
Many economists argue that in the long-term
Opec must tackle more than the just the
problem of over-supply.
"The recent agreement addresses the supply
problem, but it does not address demand. In
addition, it fails to address the fundamental
problem faced by Opec countries - the huge
dependence of their economies on oil," said
Peter Bogin of Cambridge Energy Research
Associates.
news.bbc.co.uk
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Tuesday March 23 7:12 AM ET
OPEC Agrees To Cut Oil Production
By BRUCE STANLEY AP Business Writer
VIENNA, Austria (AP) - OPEC members agreed today to cut crude oil production by 2.1
million barrels a day and maintain lower levels of output for a full year starting April 1, oil
ministers said.
The group of 11 oil producing nations approved the cuts in an effort to strengthen prices and end
a global oil glut.
''The numbers that you know are the numbers that are agreed,'' said Venezuelan Oil Minister Ali
Rodriguez.
Under the production cuts, Saudi Arabia, OPEC's largest producer, will slash output by 585,000
barrels of crude a day. OPEC's No. 2 producer Iran will curtail output by 264,000 barrels a day,
while Venezuela will pump 125,000 fewer barrels of oil a day.
Oil prices had already reflected the impact of the expected cuts, and industry analysts say
refiners of gasoline have wasted no time passing on the steeper prices to consumers.
''There's no question that gas prices in North America and the rest of the world have risen
because of OPEC's decision,'' said Doug Terreson of Morgan Stanley, speaking from his office
in Houston.
The agreement to curtail production was reached two weeks ago. Crude prices responded by
jumping almost $3 a barrel, and gasoline prices followed suit.
''After it became evident that OPEC was going to cut production, the price at the pump really
began to move quickly,'' said George Gaspar of Robert W. Baird and Co., a financial services
firm based in Milwaukee, Wis.
The average price of all grades of gasoline at U.S. service stations surged nearly 81/2 cents per
gallon over the past two weeks, according to the Lundberg Survey, the steepest and fastest
increase since Iraq invaded Kuwait in 1990.
Prices shot up more than 9 percent at self-service pumps in the United States, where unleaded
regular averaged nearly $1.03 in the latest survey, compared with just over 94 cents two weeks
ago, according to the California-based Lundberg.
Analysts say OPEC's plan to curtail production accounted for at least half of the rise in gasoline
prices.
Another reason for more expensive gasoline has been the approach of spring, when people
usually begin spending more time in their cars.
A decision by OPEC to pump less oil will likely cause gasoline prices to rise further - by two
to three cents a gallon for every additional dollar increase in the price for a barrel of oil, said
Fergus McLeod of the securities firm BT Alex. Brown.
dailynews.yahoo.com
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Tuesday March 23 8:06 AM ET
Oil Dips But OPEC Deal Wins Trade Approval
LONDON (Reuters) - World oil prices barely flinched from slightly lower levels Tuesday after
OPEC agreed to cut oil supply to glutted markets.
Oil traders said any downward correction was merely a market reaction to sharp gains over the
past few weeks and they broadly welcomed the deal.
The cartel, meeting in Vienna to ratify a pre-arranged deal, had delivered a believable deal and
prices look set to rise later in the year as the cuts soak up surplus oil, they said.
The Organization of the Petroleum Exporting Countries agreed to trim about by seven percent or
some 1.7 million barrels a day (bpd) from exports for one year.
''OPEC have got some credibility back. Now it's up to them to follow it through,'' said Bob
Finch, head of trading at Vitol SA in London.
Brent crude oil, the world benchmark grade, was down 16 cents at $13.72 a barrel at 12:42 p.m.
GMT. Prices have gained $1.50 since Gulf oil producers first indicated cuts were likely and
have jumped around 30 percent in the past month.
Oil traders and analysts said they expected prices to stay roughly at current levels for a while
but to climb later in the year as surplus oil begins to be mopped up.
The producer group hopes to lift Brent to around $18 but analysts are tending to err on the side
of caution.
Last month a Reuters poll of oil industry experts forecast an average of just $12.61 for Brent this
year. Many are now revising their forecasts upwards and predicting levels nearer $15 or $16 by
the end of the year.
So far this year Brent has averaged $11.22, nearly 16 percent less than the $13.34 average seen
last year, the lowest average price for 22 years.
Oil analysts believe the deal to cut exports will lift prices even if OPEC doesn't stick rigidly to
the agreement.
''About 70 to 75 percent compliance is a reasonable amount ... We won't see a big draw in the
second quarter but it should prevent a large build-up,'' said Jonathon Wright of Merril Lynch in
London.
World oil demand usually takes a seasonal downturn in the second quarter as demand for winter
heating oil subsides. In recent years that downturn coincided with surging oil exports which
flooded into storage tanks.
''As we go into the third and fourth quarter inventories should be drawn. We expect $16 for
Brent by the end of the year'' said Wright.
''If they stick near enough to the deal then it should get rid of most of the surplus by the end of
the year,'' said Mike Barry of Energy Market Consultants in London. ''We expect to see $15 by
the end of the year and we haven't seen enough evidence yet to change our view.''
OPEC appears convinced that it has overcome the stumbling blocks that ruined its efforts last
year at market intervention. It insists there will be compliance by all members.
The deal signed Tuesday was negotiated by five key producers in The Hague on March 12, with
the consent of fellow exporters.
The new limits, OPEC's third attempt at draining the glut, mean it will have removed more than
four million barrels a day from the world oil market in a year, a 16 percent cut.
OPEC action last year had proved too little too late to tackle a towering petroleum stockpile
exacerbated by failing Asian demand, sending oil prices crashing and costing OPEC $50 billion
in lost export revenues.
Non-OPEC Mexico, Norway and Oman have promised their cooperation with OPEC and
together will remove nearly 290,000 bpd. Oil consuming countries remain comfortably
protected for now by a global stock excess estimated as high as 500 million barrels in a world
market that uses 75 million barrels daily.
dailynews.yahoo.com
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Friday, March 19, 1999 Published at 19:20 GMT
Business: The
Economy
Is inflation beaten?
Has the effect of oil prices on inflation been
underestimated?
The BBC's Rodney Smith looks at the
prospects for inflation and asks whether it
really has gone away.
Inflation's gone away. Hooray!
Well, not quite.
Western governments are cock-a-hoop with
their success at licking inflation. Deflation has
become the fear of the age.
Profound economic thinkers are hard at work
on solutions to defeat this new monster. Many
are vocally trying to persuade governments that
it is time to relax the tight economic reins that
curbed regularly rising prices.
But they may be wrong, seriously and
alarmingly wrong.
The Opec factor
The cost of oil could
soon rise in a repeat of
the early 1970s, when
the Organisation of
Petroleum Exporting
Countries, Opec,
quadrupled prices and
almost destabilised the
world's economy. As
people discovered then,
everything runs on oil, or
on something which runs
on oil.
Since then, the oil-consuming West, in
particular, has grown familiar with the ideas
that:
Opec has become incapable of exerting
the same discipline again
There is plenty of non-Opec oil
This may be unjustified simple thinking, says
energy expert Dr David Fleming. He told Sue
McGregor on the Radio Four's Today
programme that figures published by the most
respected energy research organisation, the
International Energy Agency, show that world oil
supply and demand are diverging, and heading
for a deficit.
The gap will have to be filled by Opec
producers, he says, giving them their more
power than they have for 20 years.
The IEA, whose figures Dr Fleming used,
responded by saying that this was too extreme
a view, but that oil prices might go to $25/bbl -
double what they are now.
Connection 'underestimated'
But Dr Fleming's remarks come at an
interesting time. Coincidentally, at least one
other stockbroker research team has
concentrated on a closely related subject.
BT Alex Brown warns investors against the
popular belief that low inflation is the result of
the achievement of a structural adjustment. On
the contrary, say Ian Hartnett, Bob Semple and
company, current low inflation is the result of low
oil prices. And they go on to show that low oil
prices have always led periods of low inflation
and vice versa.
Not only that, they say, politicians have regularly
underestimated this connection, since the first
oil shock.
They have not looked for evidence that oil
prices will rise; they have taken that for granted
news.bbc.co.uk
Charles |
