MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURS. JUNE 25, 1998 (3)
OIL & GAS, Con't
Saudi Sees Oil Price Recovery Even With Cheating
LONDON - Saudi Arabia expects some oil producers to cheat on an agreement to cut oil supply, but believes prices will still recover even without full compliance, Oil Minister Ali al-Naimi said in interviews published Friday.
Naimi spoke to the Financial Times and The Wall Street Journal on Thursday, a day after the Organization of Petroleum Exporting Countries agreed at a meeting in Vienna to take 1.355 million barrels per day (bpd) out of the glutted market to support prices.
''The market doesn't believe the compliance will be 100 percent, and they are probably right,'' Naimi told the Journal. ''I don't think anybody expects 100 percent compliance.''
He did not say which countries were most likely to break their pledges -- non-OPEC producers, including Mexico, Russia and Norway, have also promised to remove 500,000 bpd in coordination with OPEC.
But he told the Financial Times he expected OPEC to ''muddle through'' over the next few months.
Oil producers have pledged to cut production by a total 2.6 million bpd so far this year, when prices have sunk to their lowest level in more than a decade. The second round of cuts is to take effect starting July 1.
''Once the price goes up, there will be cheating,'' Naimi told the WSJ.
But, even without full compliance, he believed prices would improve.
''Is 3 million going to be pulled out of the market? Probably not. But is 2.5 million? That is still good,'' Naimi added in the interview.
Oil traders expressed surprise at Naimi's comments, but applauded his honesty and said it was probably better for the fragile oil market to hear the comment now than later.
''I was a bit surprised,'' said Bob Finch, head of trading at Vitol SA, the world biggest independent oil trading and refining company.
''I would give it a prize for honesty but not for diplomacy,'' said Nigel Saperia of Bankers Trust in London.
''It's probably not what the market wanted to hear,'' said Scott Carter, senior oil trader at Tosco Petroleum in London.
Despite their surprise at Naimi's candor, most traders said it was better to comment now with prices near recent lows rather than later in the year, when pessimistic remarks by the minister of the world's biggest oil exporter might jeopardize a price recovery.
In both interviews, Naimi called for a new alliance of oil exporters that would be prepared to undertake ''benign intervention'' in global energy markets.
There were ''eight or nine countries that have the reserves, production capacity and dependence on oil revenues'' which could fulfill the role, Naimi said, without specifying any country.
He also told the Saudi newspaper al-Hayat the market should be given time to recover, although he believed prices would rise before the end of the year once the market saw proof of the cutbacks.
''The market should be given until the end of the year but I am certain that prices will improve if things go as we planned,'' Naimi said, adding he saw a price range of $18-$21 a barrel as acceptable.
Prices have sunk to just over $13 a barrel despite the larger than expected cuts agreed. This is some $6 below last year's average, and analysts say the market will need to see evidence of the cuts if there is to be a recovery in the third quarter, when prices normally move up in preparation for the Northern Hemisphere winter.
Experts say it will take months to detect the tell-tale shifts in physical crude flows that provide proof of restraint.
Naimi said Saudi Arabia -- the biggest producer within OPEC, with production still above 8.0 million bpd even after the pledged cuts --had notified its customers by telephone of the reductions to take effect beginning in July.
Asked if Saudi Arabia would have agreed to reduce its output below the 8.0 million bpd, Naimi argued that demand for Saudi crude was such that it would be difficult to do so.
''The figure of 8 million barrels per day is not a magic one. Had there been agreement yesterday (in Vienna) to go lower, there would have been no objection if this would have served a purpose,'' Naimi told the London-based al-Hayat.
Would OPEC Really Cheat?
Saudi Minister Shocks Oil Markets By Expecting Cartel To Cheat On Supply Cuts
June 26, 1998: 8:33 a.m. ET
LONDON - Oil traders expressed surprise Friday at comments by the oil minister of OPEC linchpin Saudi Arabia that he expects producers to cheat on a deal reached only two days ago to cut crude oil supplies.
But they also applauded the kingdom's honesty and said it was probably better for the fragile oil market to hear the comment now than later.
OPEC's boldest cuts in years were welcomed by analysts but greeted with some skepticism by oil traders familiar with the cartel's habit of cheating on past agreements.
The market punished the comments, kicking Brent crude down 50 cents per barrel to $13.11 in early trading.
The Organization of the Petroleum Exporting Countries (OPEC) chopped another 5 percent off output on in an attempt to drain brimming oil storage tanks and raise prices.
However, in interviews with newspapers Thursday, Saudi Arabian oil minister Ali al-Naimi said he expects some oil producers to cheat on the agreement.
"The market doesn't believe the compliance will be 100 percent and they are probably right. I don't think anybody expects 100 percent compliance," he told the Wall Street Journal.
"Is 3 million going to be pulled out of the market? Probably not. But is 2.5 million? That is still good," Naimi added.
He did not say which countries were most likely to break their pledges -- non-OPEC countries like Norway, Russia and Mexico have also promised to curb output -- but analysts said it was obvious he was referring to fellow OPEC members.
The oil traders expressed surprise that he highlighted the group's lack of discipline so soon after the meeting but acknowledged that doubts over future compliance may have already been priced into the market.
"I was a bit surprised," said Bob Finch, head of trading at Vitol SA, the world biggest independent oil trading and refining company.
"I would give it a prize for honesty but not for diplomacy," said Nigel Saperia of Bankers Trust in London.
"It's probably not what the market wanted to hear," said Scott Carter, senior oil trader at Tosco Petroleum in London.
Despite their surprise at Naimi's candor, most traders said it was better to comment now with prices near recent lows rather than later in the year, when pessimistic remarks by the minister of the world's biggest oil exporter might jeopardize a price recovery.
OPEC's latest agreement is to trim 1.355 million barrels per day (bpd) from supply, meaning a total of 2.6 million bpd will be taken off the market when cuts made in March by the 38-year-old cartel are added together.
Experts say it will take months to detect the tell-tale shifts in physical crude flows that provide proof of restraint.
"It will take some time for the cuts to work through the system on international markets," said OPEC President and United Arab Emirates Oil Minister Obaid bin Saif al-Nasseri earlier this week..
But he added: "We are confident that the action we are about to take will remove excess supplies and thus banish the volatility so plaguing the market."
Naimi also expects a tightening oil market but warned in his interview that "once the price goes up there will be cheating."
Oil Traders Surprised by Saudi Oil "Cheat" Comments
LONDON, June 26 - Oil traders expressed surprise on Friday at comments by the oil minister of OPEC linchpin Saudi Arabia that he expected producers to cheat on a deal reached only two days ago to cut crude oil supplies.
But they also applauded the kingdom's honesty and said it was probably better for the fragile oil market to hear the comment now than later.
OPEC's boldest cuts in years were welcomed by analysts but greeted with some scepticism by oil traders familiar with the cartel's habit of cheating on past agreements.
The Organisation of the Petroleum Exporting Countries chopped another five percent off output on in an attempt to drain brimming oil storage tanks and raise prices.
But prices fell in the immediate aftermath of a the deal that may yet reap rewards for oil producers in the fourth quarter of this year.
Saudi Arabian oil minister Ali al-Naimi said immediately after the deal was struck on Wednesday: "I am extremely happy (with the agreement)".
But in interviews with newspapers on Thursday, he said he expected some oil producers to cheat on the agreement.
"The market doesn't believe the compliance will be one hundred percent and they are probably right. I don't think anybody expects one hundred percent compliance." he told the Wall Street Journal.
"Is three million going to be pulled out of the market? Probably not. But is 2.5 million? That is still good," Naimi added in the interview.
He did not say which countries were most likely to break their pledges -- non-OPEC countries like Norway, Russia and Mexico have also promised to curb output -- but analysts said it was obvious he was referring to fellow OPEC members.
The oil traders expressed surprise that he highlighted the group's lack of discipline so soon after the meeting but acknowledged that doubts over future compliance may have already been priced into the market.
"I was a bit surprised," said Bob Finch, head of trading at Vitol SA, the world biggest independent oil trading and refining company.
"I would give it a prize for honesty but not for diplomacy," said Nigel Saperia of Bankers Trust in London.
"It's probably not what the market wanted to hear," said Scott Carter, senior oil trader at Tosco Petroleum in London.
Despite their surprise at Naimi's candour, most traders said it was better to comment now with prices near recent lows rather than later in the year, when pessimistic remarks by the minister of the world's biggest oil exporter might jeopardise a price recovery.
OPEC's latest agreement is to trim 1.355 million barrels per day (bpd) from supply, meaning a total of 2.6 million bpd will be taken off the market when cuts made in March by the 38-year-old cartel are added together.
Experts say it will take months to detect the tell-tale shifts in physical crude flows that provide proof of restraint.
"It will take some time for the cuts to work through the system on international markets," said OPEC President and United Arab Emirates Oil Minister Obaid bin Saif al-Nasseri earlier this week..
But he added: "We are confident that the action we are about to take will remove excess supplies and thus banish the volatility so plaguing the market."
Naimi also expects a tightening oil market but warned in his interview that "once the price goes up there will be cheating".
OPEC faces an anxious wait to learn if it has finally managed to clear up an oil market mess created by its own mistakes.
Counting the cost of a badly timed November decision to grab back waning market share, Wednesday's agreement to turn down the taps is the group's third stab at resuscitating oil prices.
The latest initiative is in line with most experts' estimates of how much oil had to go if producers were to start chipping away at the mountainous petroleum stockpile that has built up.
And producers' hopes of replenishing parched revenues are overshadowed by threats of deepening economic turmoil in Asia and a rush of new Iraqi oil supply, as well as the usual doubts about OPEC's ability to translate words into deeds.
"People who are hungry will come to the right decision," Naimi told the WSJ.
Naimi also told the Saudi newspaper al-Hayat that the market should be given time to recover, although he believed prices would rise before the end of the year once the market saw proof of the cutbacks.
"The market should be given until the end of the year but I am certain that prices will improve if things go as we planned," Naimi said, adding that he saw a price range of $18-$21 a barrel as acceptable.
Asked if Saudi Arabia would have agreed to reduce its output below the 8.0 million bpd, Naimi argued that demand for Saudi crude was such that it would be difficult to do so.
"The figure of eight million barrels per day is not a magic one. Had there been agreement yesterday (in Vienna) to go lower, there would have been no objection if this would have served a purpose," Naimi told the London-based al-Hayat.
Chronology Of OPEC Bid To Reverse Oil Price Slide
LONDON, June 25 - OPEC agreed on Wednesday to cut crude oil output by 1.355 million barrels per day to rescue oil prices from a 12-year low. The latest deal brings total cuts by members and non-members to some 2.6 million bpd so far this year.
The second round of cuts will come into effect on July 1.
Following is a chronology of events that led to the slide in the oil price and actions by the 11-member Organisation of the Petroleum Exporting Countries to remedy the situation.
1997
Nov 30 - OPEC ministerial meeting in Jakarta decides to increase output by 10 percent to 27.5 million bpd for the first six months of 1998 from a long-ignored 25.033 million bpd ceiling. It was the first time OPEC had raised its ceiling in four years.
Gulf sources say OPEC linchpin Saudi Arabia thinks world oil market will easily soak up higher production quotas, which are actually down 320,000 bpd from the October wellhead production.
Dec 1 - In immediate bearish reaction from the markets, world oil prices trade sharply lower in the aftermath of the deal. Benchmark Brent futures slip more than 50 cents to $18.40 a barrel in Singapore.
1998
Jan - Oil prices begin steady decline in the aftermath of the Jakarta agreement, but other factors behind the fall include dwindling demand growth in economically-troubled Asia, a mild winter in the northern hemisphere and increases in U.N.-monitored Iraqi exports under the ''oil-for-food'' deal.
March 1998 -- Iraqi exports hit post 1990-91 Gulf War record of 1.31 million bpd from 1.1 million in February and 500,000 bpd in January.
March 12 - Brent sinks to fresh nine-year lows as prompt Brent hits $12.70 a barrel as markets see no signs from producers of serious efforts to curb the severe global supply glut.
Saudi Arabia calls on OPEC quota-busters, in particular Venezuela, to rein in production. Venezuelan President Rafael Caldera says the price slump was not due to his country's increased output and criticises OPEC's quota system as outdated.
March 17 - Front month Brent futures contract sinks to new historic low of $11.90 a barrel.
March 22 - OPEC-members Saudi Arabia and Venezuela and non-OPEC nation Mexico agree after secret talks in Riyadh to cut world supplies by a collective 1.6 million bpd from April 1 to the end of the current year.
Norway, Oman and other oil exporters also promise reductions under the Riyadh Pact. Analysts say the low pulse of oil demand in the spring would mean heavy stocks in Western markets would put even more weight on prices.
March 30 - OPEC ministers, excluding Iraq, agree at emergency meeting to cut output by 1.245 million bpd from April 1 under the Riyadh Pact.
Markets are unimpressed by pact under which Saudi Arabia takes biggest cut (300,000 bpd), followed by Venezuela (200,000 bpd) and Iran (140,000 bpd) then 125,000 bpd each for Kuwait, United Arab Emirates and Nigeria. Commitments from others put total pledged cuts at 1.5 million bpd.
June 4 - Saudi Arabia, Venezuela and Mexico pledge further cuts after secret talks in Amsterdam. Under the Amsterdam Pact, Saudi says it will cut output by a further 225,000 bpd, Venezuela by 125,000 bpd and Mexico by 100,000 bpd.
June 12 - Senior Kuwaiti officials says OPEC needs to cut output by at least one million bpd to boost prices.
June 15 - July NYMEX crude hits 12-year-low.
June 16 - United Arab Emirates, Kuwait and Oman pledge cuts totalling 170,000 bpd from July 1 after a meeting of Gulf Cooperation Council oil ministers in Riyadh.
GCC says six members Saudi Arabia, Kuwait, United Arab Emirates, Oman, Qatar and Bahrain have cut output by a combined 1.025 million bpd since March 22 Riyadh pact.
June 16 - Kuwait Oil Minister Sheikh Saud Nasser al-Sabah says OPEC members so far pledged cuts of 800,000 to one million bpd as of July 1.
June 24 - OPEC promises to cut global crude oil supplies by 1.335 million bpd -- bringing total cuts to start from July 1 to about 2.6 million bpd. Oil prices fall in a surprise slide despite the deal which cuts deeper into supply than expected. Analysts say eventual proof of restraint would push prices higher.
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