Sunday March 14 4:41 PM ET
Analysts: Time Is Right for Oil Cut
By TAREK AL-ISSAWI Associated Press Writer
DUBAI, United Arab Emirates (AP) - The success of an agreement to cut oil production and
raise prices depends on all countries doing their share - something Gulf oil analysts said Sunday
is likely given the costly effect quota-busting has had on prices.
Gulf states have seen their revenues hit hard by the slide in oil prices, which until recently had
been hovering near its lowest levels in 20 years - about $10 per barrel.
Major oil producers announced Friday a plan to cut production by more than 2 million barrels a
day, which could lift prices to $15 per barrel by year's end ''if the producers remain committed
to the agreement,'' according to a former Saudi oil minister.
''I hope oil producers have learned a lesson from the drop in oil prices,'' Ahmed Zaki Yamani
told the Qatar News Agency.
News of the planned cuts has pushed oil prices upward. On Friday, the price for April delivery
of light, sweet crude rose 18 cents to close at $14.49 a barrel on the New York Mercantile
Exchange, after hitting an intraday high of $15.11 - the highest since early October.
In London, North Sea Brent Blend crude oil rose 42 cents to $12.60 per barrel at the
International Petroleum Exchange, after hitting an intraday high of $13.19. Brent crude last
settled above $13 per barrel in November.
Abdul Aziz Dagastani, a Saudi economics expert, is among those analysts who are confident that
the pain caused in part by some nations' quota violations will strengthen producers' will to
comply.
''The low level of prices will be a great motivation for the members of the Organization of
Petroleum Exporting Countries to commit themselves to the deal. They realize that commitment
achieves their mutual interests,'' Dagastani said.
According to an independent Saudi study, oil revenues of six Gulf nations - Saudi Arabia,
Kuwait, the United Arab Emirates, Oman, Bahrain and Qatar - fell from $90 billion in 1997 to
$55 billion in 1998, a 39 percent drop.
Optimism, however, often has followed production agreements, then faded quickly.
In recent years, Iran and Venezuela have reportedly been the biggest OPEC quota-busters. Other
OPEC members privately have accused Iran of overproducing an average of 300,000 barrels
per day and Venezuela, 100,000 barrels per day.
Iran has denied violating its quota, and the dispute over the baseline for Iran's oil production
cuts was resolved last week, though at what level wasn't clear. Venezuela generally hasn't
commented on reports that it is cheating, though the nation's new government has said it will
respect its quota.
Jassem al-Saadoun, an independent Kuwaiti economist, said the latest agreement would be
''worthless'' without compliance, but noted it had the ''blessing of very strong parties, including
the United States.''
Washington fears low oil prices will produce political and social instability in the Gulf region,
al-Saadoun told The Associated Press.
Kuwaiti Oil Minister Sheik Saud Nasser Al-Sabah said Saturday that the agreement calls for
production cuts of 2.029 million barrels per day, including 140,000 barrels per day from
Kuwait.
A breakdown of the deal, which takes effect April 1 as the industry heads into the season when
oil demand lessens, is to be announced at the March 23 OPEC meeting in Vienna. Analysts
agree the key to its success is compliance with set quotas.
''The password is compliance,'' said Abdullah al-Dabbagh, a member of the financial and
economic committee in the Saudi consultative council.
dailynews.yahoo.com
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Producers' pact to cut supply of oil is unlikely to succeed
By Steve Liesman, Jonathan Friedland
and Thomas T. Vogel Jr.
THE WALL STREET JOURNAL
March 15 — After a 13-month downturn
in oil prices and squabbling among the
world's producers, last week's
agreement to cut world petroleum
supplies suffers from a credibility
problem. Skeptics contend that Friday's
decision by major oil-producing nations
to reduce world supplies by two million
barrels a day looks doomed to fail. The
only question, they say, is how quickly
the agreement will collapse.
ON THE ONE HAND, they expect
cheating by producers, who could find it hard
to keep their oil off world markets amid
higher prices. In addition, higher prices
allow higher-cost production to come back
on line, which could start the oversupply
cycle once again.
“The old reality will dawn again,” says
an official from the Organization of
Petroleum Exporting Countries, who insisted
on anonymity. “People will start producing
more, lots of production you have taken out
will come back and delays on production
from non-OPEC sources will be lifted.”
A QUESTION OF DISCIPLINE
At the heart of the skepticism is the
question of whether the 40-year-old OPEC
cartel, even in concert with some non-OPEC
producers, such as Mexico, can really
discipline the market the way it used to.
OPEC controls only about 40% of world
production, and the agreement will reduce
that share. Meanwhile, new technology,
greater availability of capital and the creation
of even bigger oil companies as a result of
recent mergers means that non-OPEC supply,
after its recent dip, should rebound fairly
quickly.
“There has been only some permanent
loss [of non-OPEC production],” says Leo
Drollas, chief economist with the Centre for
Global Energy Studies. “In a year's time,
prices will be weak again.”
Add to that the vagueness of the accord,
in which oil officials from Venezuela, Saudi
Arabia, Mexico, Algeria and Iran agreed on a
formula for world producers to cut output by
about 2.6% of global production of 75
million barrels a day. The accord, which is
for one year beginning April 1, is subject to
approval at the OPEC meeting in Vienna next
week.
Saudi Arabia, the world's largest
producer, is believed to have consented to
cut its output by 500,000 to 600,000 barrels
daily, taking it below the eight million
barrels a day which it has tried to defend for
the past several years. Iran, a perennial
cheater on such agreements, is reported to
have committed to reduce production by
about 200,000 barrels a day. Kuwait's oil
minister said over the weekend that his
country would contribute cuts of about
140,000 barrels a day.
Mexico, as it did in similar agreements
struck last year, has promised to cut exports,
not production, and is committed only through
December, when the government's fiscal year
ends.
DOUBTFUL PROMISES
The contribution of other OPEC and
non-OPEC members is unclear. Many of the
most economically troubled producers, such
as Indonesia and Russia, have a history of
promising cuts that aren't delivered.
To be sure, many analysts see the accord
fueling higher prices, at least in the
short-term. Futures prices of West Texas
Intermediate Crude for April delivery gained
18 cents on the New York Mercantile
Exchange Friday, to close at $14.49. Prices
this year had fallen as low as $11.35 a barrel
in mid-February. Some of the cuts,
particularly from Saudi Arabia, the most
reliable party to such agreements, will
certainly be felt in the markets.
Saudi Oil Minister Ali Naimi warned
skeptics not to be too sure about cheating.
“Compliance is going to be very high from
now on because of this agreement,” he said.
“There is a very high level of commitment.”
Indeed, some analysts believe that the
economic pain caused by low oil prices
might be enough to motivate compliance.
But while Saudi sources talk of regaining
1996 and 1997 prices of $18 to $20 per
barrel, Luis Tellez, Mexico's energy
secretary, was less optimistic. Mr. Tellez
says a combination of factors, including
better oil-production technology, the
widespread substitution of natural gas for
diesel in the electricity industry, and the
opening of new oil fields, will continue to
keep a lid on prices. “We don't see a return
to the prices seen in 1996 and 1997 in the
medium term,” he says.
Indeed, some say the newest round of
cuts are so large that the agreement could
collapse of its own weight. “The greater the
expectation,” the OPEC official said, “the
greater the disappointment.”
Opposition in Venezuela
One problem could quickly come from
Venezuela. Union leaders representing oil
workers were caught off guard by the accord.
Just five days ago, Energy Minister Ali
Rodriguez told the union that no more cuts
would be made.
Carlos Navarro, head of Venezuela's
largest labor union, said on Friday that the
union was “absolutely opposed” to further
cuts because they would “deepen the fiscal
deficit and worsen the social situation.”
OPEC and its non-OPEC allies have not
cut production since last June, in part out of
fear that the cuts would give back market
share to non-OPEC producers. Instead,
leaders in the cartel reduced output modestly
and attempted to force some non-OPEC
production off the market.
While OPEC countries talked publicly
about reducing output, they were quietly
preparing for a time when demand for their
oil would rise sharply. Saudi Arabia, Kuwait
and Iran have all, in varying degrees, invited
foreign investment into their energy sectors in
order to boost production and export
capabilities.
But the producing countries found their
immediate need for cash too great, says Mr.
Drollas, the economist. The cuts “are
short-term fixes born of desperation,” he
says. “Longer term, OPEC is not solving
anything by doing this.”
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