OPEC SPECIAL REPORT TO START MONDAY MARCH 23, 1998 (page 1 of 2 pages)
EVENT
Oil giants clinch Riyadh pact to cut output
DUBAI, March 22 - Oil powers Saudi Arabia, Venezuela and Mexico on Sunday announced a multinational plan to boost crude prices, orchestrating a deal aimed at slashing up to two million barrels per day (bpd) of supply from the ailing world market.
Analysts said the startling unanimity of purpose from countries inside and outside of the Organisation of the Petroleum Exporting Countries meant oil prices would rise sharply when the market reopened on Monday.
After two days of secret talks in Riyadh the oil ministers of OPEC's Saudi and Venezuela and non-OPEC Mexico on Sunday released a joint statement saying that commitments had already been received to cut 1.1 million bpd, beginning April 1 until the end of the year.
The lion's share of the reduction will come from OPEC producers. A senior Gulf source said all bar Iraq in the group were expected to reduce from current supply levels, rather than official OPEC quotas, for a combined cut of 1.3 million bpd from the group.
''The three ministers decided to undertake an effort together with the rest of OPEC members as well as non-OPEC producers to withdraw from the market an amount of 1.6 to two million bpd,'' said the joint statement, released on the official Saudi Press Agency (SPA).
A two million bpd reduction would amount to 2.7 percent of the 75 million bpd of global supply.
Saudi Arabia's Ministry of Petroleum and Mineral Resources headed by Ali al-Naimi simultaneously issued a separate statement saying it would cut its own supply to the market by 300,000 bpd from current output rates, recently running at 8.7 million bpd.
Oil dealers said the pact was sure to spark an immediate and sharp recovery in crude prices which recently fell to a nine-year low, taking North Sea Brent below $12.
''A cut of two million bpd will get Brent back up to the $16 a barrel level,'' said analyst Mehdi Varzi at Dresdner Kleinwort Benson
''But they will need two million to restore confidence in the market place particuarly given the prospect of extra Iraqi exports.''
Analysts said the announcements implied an unprecedented level of cooperation had been achieved between OPEC and producers outside the 11-country organisation.
Non-OPEC Mexican Oil Minister Luis Tellez and Venezuelan Erwin Arrieta travelled secretly to Riyadh for the talks with Saudi's Naimi.
Mexico's energy ministry immediately said it would reduce oil exports by 100,000 barrels per day (bpd) from April 1.
Venezuela later announced its own oil exports would be cut by 200,000 bpd.
For OPEC giants Saudi Arabia and Venezuela the pact appeared to settle a simmering row about production that in recent months has damaged the group of Middle Eastern, Asian, African and Latin American producers.
''It looks as if OPEC has made itself whole again,'' said Peter Gignoux of Salomon Smith Barney. ''There was obviously a realisation that things had gotten out of hand.''
The joint statement from Riyadh said further details of the exact output cuts would be announced after talks with other oil suppliers in the coming few days.
Kuwait chimed in with an announcement that it would cut output by 125,000 bpd and Algeria added a further 50,000 bpd.
Iran's Oil Minister Bijan Zangeneh said Tehran would slash production by 140,000 bpd.
Non-OPEC producers other than Mexico did not immediately come forward. But a source close to the talks said it was expected non-OPEC countries together would contribute at least 400,000 bpd.
Non-OPEC Norway, the world's second largest oil exporter after Saudi Arabia, on Sunday said Oslo would not exclude the possibility of an output cut as part of the agreement between OPEC and non-OPEC states.
''We are not prepared to take a position to reduce production now. But we are positively awaiting developments,'' Tore Sandvold, director general of the Norwegian oil and energy ministry told Reuters on Sunday.
Asked if Norway would cut oil output he added: ''We have not in principle excluded it.''
Saudi Arabia's Oil Minister Ali Naimi said earlier this month that the kingdom would not on its own cut output unless other producers, including those in OPEC, showed more of a willingness to trim flows.
''The continuity of this situation is very harmful to oil producers as well as consumers. The international oil market needs to be balanced and stable,'' the Saudi petroleum ministry statement on Sunday said, referring to a fall in oil prices over the last three months.
Oil prices have slumped $8 since early October partly because OPEC itself raised its official supply ceiling by ten percent.
The price fall has shrunk the earnings flooding into the treasuries of all oil prpoducers, raising fears for economic growth and the political stability of some of the oil-dependent states.
Oil output cuts detailed after Riyadh pact
LONDON, March 23 - Below is a table detailing oil output cuts announced on Sunday by various oil producing countries as part of an international deal aimed at mopping up excess oil from glutted markets.
The deal, struck in the Saudi Arabian capital Riyadh after secret talks this weekend, aims to cut between 1.6 to two million barrels per day (bpd) from oil markets.
In a joint statement Saudi Arabia, Venezuela and Mexico said they already had secured a combined commitment from OPEC and non-OPEC oil producers to cut 1.1 mln bpd.
OPEC countries agreeing to output cuts (barrels petroleum daily) included Saudi Arabia (300,000 bpd), Venezuela (200,000 bpd), Iran (140,000 bpd), Kuwait (125,000 bpd), Algeria (50,000 bpd), United Arab Emirates (125,000 bpd) and Libya (80,000 bpd). The remaining four members are Indonesia, Iraq, Nigeria and Qatar.
NON-OPEC countries agreeing to output cuts include Mexico (100,000 bpd) and Oman (30,000 bpd).
Running Total OF All Of The Above Is 1,150,000 bpd
(Kerm's Notes)
** Iraq has been excluded from the group due to special considerations being worked out with the United Nations.)
**Qatar said it would announce its response on Monday.
**Norway said it was still undecided either way on any output cut on Monday morning but said Oslo it was ''positively awaiting the situation.''
** Indonesia said it was ready to cut output ''but we have to study by how much.''
** Russia's ministry of fuel and energy would not comment on Monday on whether Russia had been involved or consulted over an agreement by several OPEC and non-OPEC members to cut oil production over the weekend. ''I simply don't know,'' said Yuri Nogotkov, a spokesman for the ministry said. He had said at the end of last week that as far as he was aware, no formal discussions had taken place. Iranian Oil Minister Bijan Zanganeh was said by an OPEC delegate and a trade source to be due to visit Moscow on Tuesday to discuss Russia cutting its oil output.
** A senior oil ministry official on Monday said Nigeria would follow OPEC's interest, but refused to say whether any output cut had been agreed or was being considered. ''What I will say is that Nigeria is a responsible OPEC member and will do what is in OPEC interest,'' the official told Reuters by telephone from Abuja. Oil minister Dan Etete was not immediately available for comment. The official would not comment on news that a source close to weekend talks in Saudi Arabia, that agreed ouput cuts to bolster world oil prices, had said the pact assumed a cut of 125,000 barrels per day (bpd) in Nigeria's production.
** Egypt is not planning to cut crude output as part of efforts by world oil producers to shore up falling prices, an oil ministry official said on Monday. ''There will be no cut in our crude production because we have reduced our output several years ago to 850,000 barrels per day (bpd) and our demand is increasing,'' the official said. The official said that domestic demand for crude was rising by four to five percent a year and that output was steady. ''We're not intending to reduce our production beyond 850,000 bpd,'' the official said.
EFFECT
Oil stocks seen rising after Riyadh deal
NEW YORK, March 22 - Shares of U.S. oil companies, especially those involved in upstream or exploration and production operations, are expected to jump on Monday along with the price of oil after major oil producing countries announced a deal to cut world oil output.
''This is a strongly bullish development, especially for exploration & production companies,'' said Michael Metz, chief investment strategist for CIBC Oppenheimer & Co.
In Riyadh on Sunday, Saudi Arabia, Venezuela and Mexico said an agreement was reached between OPEC and some non-OPEC members to cut up to two million barrels per day or 2.7 percent of supply from a glutted world oil market. The agreement came after days of secretive talks.
The deal sent oil prices above $16 a barrel in trading on New York Mercantile Exchange's (NYMEX) out-of-hours ACCESS system at 1900 EST/2400 GMT. Bellwether oil futures for May delivery on the NYMEX closed Friday at $14.61.
Companies with upstream operations are considered far more sensitive to fluctuations in oil prices than those with only downstream, or refining and marketing, operations.
''Most mutual fund investors have been underweight in oil stocks,'' said Deutsche Morgan Grenfell oil analyst Michael Young.
According to a DMG analysis, Amerada Hess Corp. (AHC) is one of the most financially sensitive companies to oil price swings. A rise of $1 a barrel translates into a near doubling in earnings per share. Amerada Hess shares closed Friday up 87.5 cents at 59-1/2.
Crude oil futures on the New York Mercantile Exchange (NYMEX) surged at the open of out-of-hours trading on the ACCESS system Sunday after the oil supply agreement.
Futures for May delivery opened $1.14 above Friday's close of $14.61 a barrel and and climbed above $16 in the first few minutes of trading.
Young says the whole oil sector is likely to rise initially.
''In the past when the group has these big moves, they all go up; there isn't that much differentiation. Exxon, one of the least leveraged to a given change in oil price, had one of the strongest moves on Friday,'' he said.
Exxon Corp. (XON) shares rose $2.50 on Friday to 67-5/16 and touched a new year high of 67-3/4.
Young says he thinks the sector will move around 10 percent higher. ''In the year to date, the sector has underperformed between 10 and 15 percent. I expect the stocks will pretty much erase that gap and end up being market performers.''
Some oil analysts, like Young and Paul Ting of Salomon Smith Barney, had recently upgraded the sector, which had taken a beating with oil prices.
On Friday, oil shares outperformed the broader market.
Ting, in upgrading the sector, said: ''The oils should be bought now,'' recommending Texaco Inc. (TX), British Petroleum Co. Plc (UK & Ireland: BP.L), Mobil Corp. (MOB) and Exxon Corp. (XON) among the internationals and Atlantic Richfield Co. (ARC) and Murphy Oil Corp. (MUR) among the domestics.
The jump in oil prices should cushion any slip in the overall stock market. Chevron Corp. (CHV) and Exxon are components of the Dow Jones industrial average.
Though there had been much speculation last week about secret meetings between oil producers, the announcement Sunday in Riyadh came as a surprise to many.
Under terms of the deal, Saudi Arabia will cut 300,000 barrels per day, Venezuela 200,000 barrels per day and Mexicon100,000 barrels per day. Other OPEC members -- apart from Iraq, which currently exports oil only under a strictly controlled United Nations program -- would also cut, as would some non-OPEC members.
Oil prices have been in a slump since late last year, falling in New York by more than 45 percent to a nine-year low below $13 a barrel last week.
The severity of the drop had badly damaged the national finances of heavily oil-dependent countries.
Oil deal spells stock trouble
NEW YORK, March 22 - An agreement to cut global oil production should send stocks lower Monday morning, but the news might not be enough to overcome the roaring bullish momentum on Wall Street, analysts say.
''This is obviously bad news for the stock market tomorrow morning,'' said Hugh Johnson, chief investment officer at First Albany Corp.
In Riyadh on Sunday, Saudi Arabia, Venezuela and Mexico said an agreement was reached between OPEC and some non-OPEC members to remove up to two million barrels per day (bpd) or 2.7 percent of supply from a glutted world oil market.
The deal is expected to send oil prices soaring to $16 a barrel and possibly higher when they open for trading on the New York Mercantile Exchange's (NYMEX) out-of-hours ACCESS system at 1900 EST/2400 GMT. Bellwether oil futures for May delivery on the NYMEX closed Friday at $14.61.
The deal will certainly rap transportation stocks, especially airlines, but energy stocks should jump.
''There's no question this is a negative for transports,'' said Peter Canelo, U.S. equity strategist for Morgan Stanley Dean Witter. ''Some of the industrial companies like utilities and basic industries may also not be terribly happy.''
Falling oil prices, which have declined 45 percent since October 1997, have been one of the main reasons behind the jump in transports and airlines, analysts say.
The Dow Jones Transportation Average touched new highs last week, setting a closing high record of 3652.7 on March 17, given a strong leg-up by gains in airline stocks.
American Airlines' parent AMR Corp. (AMR), Delta Air Lines Inc (DAL) and US Airways Group (U) are all trading near historic highs, although the stocks closed lower Friday amid rumors of a possible OPEC cutback.
Michael Metz, chief investment strategist for CIBC Oppenheimer & Co., said the oil pact was only a modest, short-term negative for the stock market.
''The price of oil would still be within reason, and it is only one commodity among many,'' so it should not cause a spike higher in inflation, he said.
In fact, the deal removes the threat that the countries hit hardest by lower oil prices, such as Russia, Venezuela and Saudi Arabia, could suffer a Southeast Asia-like recession. ''It really could be positive from a macro-economic viewpoint because that could have been a snowball on top of Southeast Asia. This removes that danger,'' Metz said.
Whether the deal is just a stumbling block or a brick wall in the path of the Dow on its way to 9,000 is still unclear, analysts said. The momentum of Wall Street's latest buying spree may outweigh the negative news on the oil front.
The Dow Jones industrial average topped off the week by jumping 103.38 points Friday to 8,906.43, crossing 8,900 for the first time and setting its fifth straight record. For the week it rose 303.91.
Portfolio ''window-dressing'' could help stocks this week as money managers who have underperformed the benchmark Standard & Poor's 500 Index rush to put cash into stocks before the end of the quarter, some said.
But if the market turned more bearish because of the oil news, it might react more swiftly to profit warnings or any hints of inflation, analysts said. No major economic data are due out next week.
Thom Brown, managing director of Rutherford Brown and Catherwood, said the market has gotten overbought because it has been ignoring a ''wishy-washy'' earnings outlook.
The stock market has shrugged off a slew of corporate profit warnings from heavyweights including Intel Corp. (INTC - news), Compaq Computer Corp (CPQ - news) and Motorola Inc (MOT - news). The pace could pick up as the quarter winds down.
For the quarter, the nation's largest companies are expected to report average earnings increases of 1.7 percent from last year, down sharply from the 10.4 percent growth analysts were forecasting at the start of 1998, according to companies that track Wall Street profit forecasts.
It would be the slowest growth since the 1991 fourth quarter, when profits for S&P500 companies were flat.
''The market has so much momentum behind it, it is going to be tough to see any meaningful sell-off until the enormous amountof domestic and foreign money stops pouring into it,'' Brown said.
At least one analyst, Johnson, said the OPEC deal might be just the thing to slow down the inflows.
''It's always an outside event that sparks a correction, and maybe this is it,'' he said.
The Nasdaq composite index rose 17.5 points to 1,789.16 for the week. The Standard & Poor's composite index of 500 stocks rose 30.57 to 1,099.16. |
