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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: marc chatman who wrote (56927)	12/15/1999 8:49:00 AM
From: Biotech Jim	Read Replies (2) \| Respond to of 95453

From Stratfor this morning, something active followers of this sector are aware of, but it is relevant to see this viewpoint... STRATFOR.COM Global Intelligence Update December 15, 1999 The Temptation of High Oil Prices Summary: Iran announced on Dec. 14 that it would back increased production by the Organization of Petroleum Exporting Countries (OPEC) if oil prices rise any further. Tehran's announcement is part of a growing sense of unease among the world's oil-producing nations. With global oil prices at unexpected highs, oil producers are anticipating that one of their number will soon break ranks, flood the market to capitalize and cause prices to fall. Iraq is the likeliest candidate to force oil prices into a downward spiral. Analysis: Iran's representative to OPEC, Hossein Kazempour Ardebili, said that his government would support an increase in OPEC oil production if "prices go higher," Reuters reported Dec. 14. The new Iranian stance indicates a rising degree of distrust and fear among the members of OPEC and non-member oil producers. Iran is the fifth major producer to suggest in the last few days that production may have to be increased to adjust prices slightly lower and stabilize them. The high oil prices of recent months may fall in the first months of the coming year if producers can't keep production quotas intact. Oil producers have shown remarkable discipline in limiting production and boosting prices. In March, OPEC members and non-OPEC oil producers agreed to limit oil production and boost failing prices. By sticking to this agreement, producers have achieved a compliance rate of nearly 90 percent. The result has been an unexpected surge in prices. The average world price has hovered at about $25 per barrel, according to the U.S. Energy Information Administration. Oil prices are so high right now that they are not sustainable over the long term. Producers are nervously eyeing each other, wondering which one will be the first to break production quotas in an attempt to capitalize - and send oil prices tumbling, as a result. The next three months will be pivotal. In March, OPEC will meet again to assess its stance on production and by then the most profitable winter months will have passed. Consumer nations are already trying to do something about high prices. In a speech on Dec. 9, U.S. Energy Secretary Bill Richardson said that the Clinton Administration is worried about the rising price of oil and will take "whatever steps are necessary to protect the American consumer and the American economy." What the United States can do to reduce oil prices is unclear. One move might be to allow Iraq to increase output levels and drive down prices. [ stratfor.com ] Prompted by Richardson's comments, officials of several major oil producers - Indonesia, Norway, Saudi Arabia and Venezuela - said that they would consider increasing production if prices reach crisis levels. Venezuelan Oil Minister Ali Rodriguez said, "A rapid surge in prices or a rapid dip in inventories would be a problem we would correct immediately," according to Bloomberg News. So far, only Mexico, a non-OPEC nation, has called for producers to stick to the March output quotas. Mexican Oil Minister Luis Tellez cited quota compliance as the major reason for oil price stability. Cooperation between competing producers is not infinitely sustainable. Someone will break the quotas. The question now is, who? One possible candidate, and perhaps the one with the most to gain, is Iraq. Although Iraq is a member of OPEC, it has not been subject to OPEC-sponsored production quotas while under U.N. sanctions - and it has been acting unpredictable in recent weeks. Baghdad suspended oil exports Nov. 24 to protest continued U.N. sanctions and temporarily boosted prices even higher. Producer and consumer nations alike are unsure of Iraq's future actions. Able to produce up to 3 million barrels per day with comparative ease, Iraq by itself could cause prices to tumble. The price of oil now seems to hinge not so much on the economic imperatives of supply and demand, but on a political decision pending in New York. The U.N. Security Council has repeatedly postponed a decision on whether to suspend economic sanctions against Iraq, dating back to its invasion of Kuwait in August, 1990. If the Security Council suspends the sanctions, allowing Iraq to legally export large amounts of oil again, then Iraq is likely to seize the opportunity of high prices and flood the market. Three scenarios now present themselves. If the United States agrees to suspend sanctions in return for renewed weapons inspections, Iraq could quickly - within six months - reach oil production levels that it last enjoyed before the 1991 Persian Gulf War. If the Security Council rejects the U.S.-backed plan, the Iraqis could export more oil illegally. But more importantly, continued high prices will tempt other producers to take advantage. Ultimately, oil-producing nations may continue their string of successes, continue to show restraint and discipline and coordinate a gradual and controlled production increase. The temptations of high prices, though, will be hard to resist.