MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JULY 12, 1998 (8)
OIL & GAS
OPEC Must Not Repeat November's "Mistake"
KUWAIT, July 12 - Kuwait Oil Minister Sheikh Saud Nasser al-Sabah said in an interview published on Sunday that given the depressed oil price OPEC should not repeat the "big mistake" it made last November when it raised its production ceiling.
The minister, who assumed office in March, also told al- Qabas daily that the two production cuts made since March by OPEC and non-OPEC oil producers will probably need to be extended to shore up the oil price which is at its lowest level in a decade.
"The current inclination to face the drop in oil prices is to cut production and this should continue," Sheikh Saud said. "Any view to raise production is a big mistake."
Kuwait's daily OPEC quota was raised to 2.19 million barrels as of January 1 from two million when OPEC agreed at a meeting in November in Jakarta to raise the overall ceiling by about 10 percent to 27.5 million bpd.
But after the two rounds of cuts, Kuwait's quota has dropped to 1.98 million bpd. Since March, OPEC has been forced to cut 2.6 million bpd from the ceiling set last November.
Sheikh Saud said that by raising the ceiling, at a time that demand was hit by mild weather and the financial crisis in Asia, OPEC merely legitimised those countries violating their quotas.
"One of the biggest mistakes...was the Jakarta agreement to raise production...thus legalising violations and the violating countries further violated (their quotas)," said the minister who is seen by some analysts as a price hawk.
In contrast to previous Kuwait oil ministers who have fought for a higher production level for their country, Sheikh Saud has often argued that a higher oil price is more important.
In his newspaper interview, the oil minister said that given the high level of oil in storage -- which he estimated at six billion barrels - "the world could do without OPEC's oil for a long period."
OPEC's daily crude oil production in June was about 27.95 million, according to the International Energy Agency (IEA) which also said that industry-held oil stocks in the world's industrialised nations hit an all-time record at the end of May.
Bellwether Brent blend August futures closed 14 cents down in London on Friday at $12.89 a barrel -- a fall of nearly 70 cents on the week and more than $6 below average 1997 prices.
Sheikh Saud said the average price for Kuwaiti crudes has risen in recent weeks to around $10 a barrel from an earlier $7 a barrel compared with budget estimates of $13 a barrel for the fiscal year which ended on June 30. Oil revenue in the current 1998/99 draft budget was based on a $12 barrel.
He said Kuwaitis do not realise the extent of economic hardship their tiny Gulf Arab state was facing, adding that to wipe out a 1.596 billion dinar ($5.196 billion) deficit in the current 4.41 billion dinar budget, Kuwaiti crudes would have to rise to above $18 a barrel.
"What is astonishing is that we are a nation of 700,000 (Kuwaitis) and with all our brothers (foreign residents) we become two million people, so do we need a four billion dinar budget? By God I do not understand the situation," added Sheikh Saud, a former information minister and ambassador.
Kuwaitis enjoy many benefits in the cradle-to-grave welfare state which provides most basic services either free or heavily subsidised.
Iran Didn't Agree To Riyadh Pact Terms
CARACAS, July 10 - Alberto Quiros Corradi, a top Venezuelan oil adviser, said Friday that Iran didn't agree with the ground rules of the Riyadh pact to cut oil output and he suspected they were breaking the agreement for that reason.
Quiros, who was a key member of Venezuela's team in the Riyadh talks, said Iran didn't agree that cuts should be made from real production, but rather from its OPEC quota, which was higher than its production level.
"In Iran, one could talk of violation because the real point of departure of its measures was not the one agreed to," he told a local radio station.
"Iran was always reluctant to accept the rule that the cut should be measured from real production instead of quotas...It so happened that Iran was producing less than its quota so they wanted to go back to the concept of quotas and, of course, everyone opposed that."
Quiros, who despite his seniority in Venezuelan oil circles is neither a staff member of state oil company Petroleos de Venezuela (PDVSA) nor a Ministry employee, said he, therefore, suspected that Iran was violating what it had ostensibly agreed with other members of the Organization for Petroleum Exporting Countries (OPEC).
"I suspect, and it is only a suspicion, that they are ignoring the real production agreement and measured their cut from a higher level. That could represent about a 200,000-barrels-per-day (bpd) difference," he said.
Although it had an official OPEC quota of 3.942 million bpd, Iran agreed in March to cut by 140,000 bpd from its real output level, which was established at 3.623 million bpd. Venezuela's state oil company Petroleos de Venezuela (PDVSA) and the Energy and Mines Ministry have given mixed signals about its compliance with its commitment.
On Monday, PDVSA President Luis Giusti said Iran broke the agreement by 230,000 bpd, and he was backed up by PDVSA first vice president Claus Graf, who confirmed the figure.
But Energy and Mines Minister Erwin Arrieta contradicted them Friday, saying he had no evidence of violation.
Iran emphatically rejected Giusti's accusation on Wednesday, blaming the current crisis in oil markets on Giusti and asking him not to rely so much on "secondary sources" for production data.
In the Riyadh pact, producers agreed to use secondary sources as the measure of production, since governments have used false data in the past.
In its monthly survey of OPEC oil output, Reuters found that Iran produced 3.72 million bpd in April, 237,000 bpd above the level agreed in the Riyadh pact.
Quiros said that Iran's non-compliance, added to a 400,000 bpd increase in Iraqi output, which wasn't included in the Riyadh pact, meant that OPEC's declared 1.245 million bpd cut from April only removed about 500,000 bpd of oil from the market.
After the Riyadh pact failed to lift oil prices significantly from their 10-year lows, OPEC agreed in Vienna, following preliminary talks in Amsterdam, to another set of cuts, bringing the group's total agreed cut to 2.6 million bpd.
"I hope the Amsterdam agreement that starts on July 1 will have an effect on the inventories during August and that in September we should start to see a small recovery in prices, and this should become more apparent in October, November and December," Quiros added.
OPEC Official Says Oil Output Cuts Will Be Met
WASHINGTON July 10 - The world is awash in oil, and gas prices in the United States are the lowest in decades.
Late last month, the OPEC that made the world cringe in the 1970s announced an oil production cut of 1.3 million barrels a day to help rally prices. But oil prices are not rising, and the secretary-general of OPEC told skeptics here Thursday that the production cuts will be met.
Rilwanu Lukman said that member countries of the Organization of Petroleum Exporting Countries, some of whom are notorious for cheating on oil quotas, will stick to the agreed cuts to strengthen prices.
''OPEC member countries are working to ensure that recent cuts are fully adhered to,'' he said before 150 attendees at the Gulf-Asia Energy Security Conference. ''This agreement is based on voluntary self-discipline, and this time around they are going to do everything to comply to generate better oil prices.''
The move raised the amount that the cartel promised to withhold from the oil markets to 2.6 million barrels a day. Non-OPEC countries Mexico, Russia, Oman. and others agreed to a further one-half million barrel-a-day reduction, increasing the total number to 3.1 million. Experts say OPEC members will adhere to the most recent plan because of the financial pain that is being inflicted on the countries because of loss of oil revenue.
OPEC members have lost 30 per cent to 40 per cent of revenue and that is biting into national budgets, which in turn could lead to domestic problems. ''OPEC has lost $48 billion in revenue,'' said Dr. Fadhil Chalabi, executive director of the London based Centre for Global Energy Studies.
The lost revenue brought the 11 OPEC members in line; even those who have ignored production quotas such as Venezuela may abide by the accord made last month. For the time being, critics say.
''They came together because the collapse in price made it so difficult for them, Dr. Chalabi, a former assistant secretary-general of OPEC, said. ''But once the prices begin to rise again, this agreement has no guarantee to hold.'' This, he predicted, will create price volatility.
Despite the financial crisis in Asia which curbed economic growth and energy use and is a factor in the fall in oil prices, the demand for oil from the Persian Gulf region, whose countries are a dominant force in OPEC, will continue to grow over the medium and long-term, Dr. Lukman said. ''Middle East oil producers will be in the forefront meeting that demand.''
The secretary-general asserted that the oil cartel is not losing its competitive edge to non-OPEC countries from the lack of technical development. ''Not to worry. Those companies working in the North Sea [and providing new technology] are working in the gulf countries as well. We stand our ground on that basis.''
Dr. Lukman took pains to point out that the recent announcement by Saudi Arabia's oil minister, Ali Al-Naomi, suggesting the creation of an informal alliance of oil exporting countries to bolster sagging prices, does not mean a new oil cartel will be established.
The alliance would be a way to complement OPEC policies, not a structural organization, Dr. Lukman said. ''OPEC is a bloc, an organization interested in bringing on board as many members as possible to create a stable oil market.''
Output Cuts Could Still Take Some Time To Impact Markets
"Oil now slowly making its way to the market must be absorbed (and) the enormous inventories accumulated by consuming countries must be run down," the IEA said.
"The onslaught of waterborne crude oil produced in the second quarter will hit the market this quarter," it added.
The extent of oversupply earlier in the year meant commercial oil inventories held in Organisation for Economic Cooperation Development (OECD) countries hit record levels at the end of May.
OECD industry stocks rose by 2.24 million barrels a day (bpd) in May to reach 2.632 billion barrels, the highest on record, said the IEA.
"Industry stocks are now at levels that are challenging existing available storage capacity, especially in the U.S.," it said.
Indonesia Expects Oil Price to Go Up in 4th Quarter
Indonesia expects that the price of oil will rise to 17 U.S. dollars a barrel in the fourth quarter of this year, the Indonesian Observer reported Saturday, quoting a senior official.
"I'm aware of the current lower price. It (the price) is usually low in every third quarter of the year, but it will increase in the fourth quarter," Mines and Energy Minister Kuntoro Mangkusubroto said Friday.
"I'm optimistic that 17 U.S. dollars a barrel can still be achieved," he said.
The key factor behind any future price rise will be the maintenance of an agreement reached between the Organization of Petroleum Exporting Countries (OPEC) members to cut production output, he said.
The world's top oil producers grouped under OPEC agreed on July 3 to cut production by 3.23 million barrels per day (bpd) in a bid to reduce a glut and boost prices.
Indonesia, with its May 1998 output reaching 1.33 million bpd, is set to cut output by 100,000 bpd.
"The revenue from oil is very important for Indonesia. We want to see the oil price higher," Kuntoro said.
It was reported that the price of OPEC's basket of several crudes in the world market rose to 11.62 U.S. dollar a barrel on Friday, up from 11.51 U.S. dollars a barrel on Tuesday.
Analysts See Long Haul For Oil Price Recovery
LONDON, July 10 - Oil exporters' output cuts should prove enough to haul crude prices a little higher by the end of the year but oil will stay far cheaper than in recent years, a Reuters poll of industry experts found on Friday.
Producers meanwhile may face a market relapse at any time if Asia's economic crisis deepens or they lose resolve in carrying through pledged output cuts, the experts warned.
A survey of investment banks, energy consultants and oil firms forecast an average fourth quarter Brent crude price of $15.94 a barrel up from $14.51 in the third quarter.
That would represent just a mild recovery from Brent's current rut near $13. Brent has averaged just $14.28 so far in 1998 -- five dollars below last year and six below the average $20.30 a barrel of 1996.
Brent was expected to remain under the cosh next year at just $16.12, the average of analysts forecasts showed.
''We upped our third quarter forecast 50 cents just on the psychological effect of last month's new production cuts,'' said Mike Barry of London's Energy Market Consultants.
''But the fundamentals if anything are more bearish. Asia-Pacific demand is looking worse every day.''
''The only thing that's certain is that prices will be volatile,'' said Richard Savage of SG Securities in London. SG believes Brent will crawl back above $16 by the end of the year to complete a $15 full year average.
Consultants were less optimistic on the prospects for a recovery in oil prices than financiers.
An average of three consultants and one oil company forecast just $15.45 for fourth quarter Brent slipping back to $14.95 for 1999. Seven banks projected a fourth quarter price of $16.20 a barrel, rising to $16.79 next year.
Iraq remains a wild card for oil prices and attention now is focusing on October's United Nations report on Iraqi weapons compliance.
Iraq will be pushing hard for an all-clear on sanctions, allowing full resumption of oil exports through an energy infrastructure enhanced by a recent $300 million injection for repairs.
But if Baghdad is thwarted in October, analysts say it might call off the U.N. oil-for-food exchange altogether, easing producers' problems at a stroke.
''The big question for the oil market is what's coming back faster, Asia or Iraq,'' says Roger Diwan of Washington's Petroleum Finance Company.
''In the fourth quarter Brent could be anywhere between $10 and $20 depending on what Iraq does.''
Most analysts agree that over three million barrels per day (bpd) of producer cuts thrashed out in three stages this year will eventually ease the gargantuan stock surplus suffocating any price revival.
But they caution that OPEC producers must keep up the 75 percent compliance level with cuts managed so far, and be prepared to reduce more later this year if prices are still languishing.
''It all depends on whether they do what they say they're going to do,'' said Ken Haley, chief economist at Chevron (CHV). ''The fourth quarter is likely to be higher than the third quarter but after that it's a crapshoot.''
And many add that as prices creep higher, producers could renege on cutback commitments to renourish revenue-starved economies.
''There are a lot of promises not being fulfilled as quickly as they need to be,'' said Alan Struth, chief economist of U.S. independent Phillips Petroleum (P).
''As we get to the fourth quarter I imagine there will be a lot of foot-dragging.''
''Everybody's in the nail-biting stage,'' said Peter Bogin of Cambridge Energy Research Associates, who sees Brent heading for a range between $15 and $16.
More cause for producer optimism was seen by Jurjen Lunshof of Credit Lyonnais. He visualised Brent back up to $18 by the fourth quarter.
''They've got no choice but to enforce the cuts. Low oil prices are a sufficient driver to knock some sense into them,'' he said.
''Demand in US is pretty robust and we should start seeing some inventory rebuilding in Asia. 'La Nina' means we should get a more normal winter too.''
La Nina is the cold weather pattern that weather watchers believe is now following the El Nina global heatwave partly responsible for last winter's demand slump.
Economic realities also mean that sustained low oil prices must eventually force enough supply off the market to force values back up to a more familiar range.
''The non-OPEC producers, with high-cost output are the ones who will really start to suffer if prices stay at this sort of level for long,'' said Kleinwort Benson's Mehdi Varzi, predicting $16 Brent from the fourth quarter.
Details of the poll of Brent price forecasts for third quarter and fourth quarter 1998 and full year 1999 in dollars a barrel are as follows:
............................................................................... 3Q '98....4Q '98....1999
Cambridge Energy Research, Paris........................... 14.00.....15-16.....15-16
Credit Lyonnais, London.......................................... 15.50.....18.00.....19.00
Credit Suisse First Boston, New York ..................... 15.00.....16.50.....17.50
Deutsche Morgan Grenfell, London.......................... 14.00.....14.00.....15.00
Energy Market Consultants, London ....................... 14.00.....15.00.....14.00
Dresdner Kleinwort Benson, London ...................... 14.00.....16.00.....16.00
Lehman Brothers, New York................................... 13.85.....16.50.....16.50
Merrill Lynch, London............................................. 15.25.....16.25.....17.50
Petroleum Finance, Washington .............................. 14.55.....15.30.....15.30
Phillips Petroleum, Tulsa........................................... 14.00.....16.00.....15.00
SG Securities, London ............................................ 15.50.....16.27.....16.00
Average.................................................................. 14.51......15.94.....16.12
IEA Says Russia New Blow To Oil Market Rescue
LONDON, July 9 - Russia's foundering economy is the latest blow for a world oil market already suffering a severe downturn at the hands of Asia's financial crisis, the International Energy Agency said on Thursday.
A deterioration in Russia's finances had forced more oil on to glutted markets in the west in recent months, the IEA said in its Monthly Oil Market Report.
Net oil exports from the former Soviet territories, mainly Russia, hit 3.1 million barrels daily in May, a record for post-Soviet times, the agency said.
"The Russian government is determined to collect taxes, leaving cash strapped oil companies to turn to high exports for hard currencies," the IEA said.
"The economic situation has had, and will continue to have, a dampening effect on consumption with the original expectation of an acceleration in economic growth in 1998 now severely dented."
Low world crude prices are regarded as one of the major causes behind Russia's latest financial crisis but nationwide non-payments mean exports remain the only reliable means for cash-strapped Russian oil companies.
Rising Russian exports come despite Moscow's pledge to play its part in an unprecedented international effort by oil exporters to revive their market by cutting supplies.
Oil prices remained under severe pressure from record inventories, slow demand growth and an onslaught of crude approaching western markets, the IEA said.
Large volumes of oil in transit built up from overproduction earlier in the year were blocking a price recovery.
"Absorbing the oil slowly on its way to market could prove as difficult as staunching the daily flow of overproduction," the IEA said.
"The potential arrival of these barrels in the third quarter could confound efforts by producers to run down onshore excess stocks and rebalance the market."
OPEC producers earlier in June agreed with non-OPEC nations on a second round of output cuts in the space of three months in a bid to raise oil prices from 10-year lows.
OPEC agreed cuts totalling 2.6 million barrels a day from the 75 million barrels daily market and non-OPEC suppliers Mexico, Norway and Oman chipped in with their own supply cuts.
But the output reductions will take some time to make an impact on a market where prices hit 10-year lows earlier this year.
Benchmark Brent blend was valued at just $13.22 a barrel on Thursday, still $6 lower than on average last year.
"Oil now slowly making its way to the market must be absorbed (and) the enormous inventories accumulated by consuming countries must be run down," the IEA said.
"The onslaught of waterborne crude oil produced in the second quarter will hit the market this quarter," it added.
The extent of oversupply earlier in the year meant commercial oil inventories held in Organisation for Economic Cooperation Development (OECD) countries hit record levels at the end of May.
OECD industry stocks rose by 2.24 million barrels a day (bpd) in May ballooning to 2.63 billion barrels by the end of the month, the highest level on record at the Paris-based IEA.
"Industry stocks are now at levels that are challenging existing available storage capacity, especially in the U.S.," it said.
A slowdown in world petroleum demand growth has not helped producers' market rescue plans. The IEA's estimate for world demand this year was revised lower to 74.9 million bpd, marking annual growth of 1.1 million compared with 2.1 million last year.
Low Japanese demand in the power generating sector also exacerbated the slide in oil consumption among Asian economies.
"Japanese deliveries decreased year-on-year of the eighth successive month, reflecting a continuing decline in oil use in the power generation sector and an increasingly apparent slowdown in economic activity," the IEA said.
The IEA said last month it was expecting zero oil demand growth this year from Asian economies with the exception of China.
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