According to Liesman no one seems to know anything...
May 10, 1999
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Crude-Oil Report Might Not Clarify
If OPEC Really Is Cutting Production
By STEVE LIESMAN
Staff Reporter of THE WALL STREET JOURNAL
A report on the world's crude-oil supply, due Monday from the International Energy Agency, is expected to show the outlook remains muddled, because it isn't yet clear whether OPEC members are cutting their production as promised.
The report comes after a torrid $7-a-barrel rise in crude-oil prices during the past two months, and analysts are saying the market is due for a significant correction, especially if the report doesn't provide evidence that output as well as inventories have substantially declined.
Members of the Organization of Petroleum Exporting Countries agreed in March to reduce global output by 1.7 million barrels a day. The pact took effect April 1. But depending on the point of view, the barrels are half full or half empty.
Estimates of compliance range from 60% to 80%, a vast gap in a 73 million-barrel-a-day market. After flirting with $19 a barrel earlier in the week, West Texas intermediate crude fluctuated widely Friday on the New York Mercantile Exchange before closing at $18.22 a barrel, part of a continuing tug of war between OPEC skeptics and the believers.
Traders have built up an enormous net long position, a complete reversal from just 30 days ago. If they come to believe OPEC isn't hewing to its agreement, analysts expect prices could drop quickly $2 a barrel. Oil companies are said to be waiting for a price decline before they begin to ramp up refinery output for the summer driving season. If they wait too long and have to hurriedly make purchases, they could push prices over $20 a barrel.
Even under that scenario, the market looks too high considering inventory levels that are far above their five-year average.
"We still need several more months before we can pass judgment on whether this is a real recovery," says Adrian Lajous, director general of Petreleos Mexicanos, the Mexican state oil company. Mexico, a non-OPEC member, agreed to reduce its exports to support the OPEC effort.
OPEC itself doesn't officially report its output, leaving analysts to derive world supply figures by counting oil-tanker traffic, a highly inexact science that creates broad swings in estimates.
"Everybody is waiting for this number and it's really just my perception from a certain reality of tankers," says Roger Diwan, director of global oil markets at Petroleum Finance Co., a leading oil analyst.
Analysts don't even agree on whether OPEC's compliance should be counted from its first agreements in February 1998 or its last one on March 23. Mr. Diwan begins at the earlier date and says the organization has promised in three agreements to take 4.3 million barrels daily off of world markets. Together with reductions in April, Mr. Diwan says OPEC has reduced output by 2.7 million barrels, a 63% compliance rate.
Worse, three countries -- Saudi Arabia, Iran and the United Arab Emirates -- account for the bulk of the cutbacks. OPEC members Venezuela and Qatar have hardly contributed, "which doesn't inspire confidence," Mr. Diwan said.
He adds the Mediterranean Sea is awash with oil cargoes and more crude is flowing from Africa toward America. Mr. Diwan says markets will have to wait until June, when May production figures are available, to get a feel for OPEC compliance and summer demand for gasoline.
But Gary Ross, head of PIRA Energy Group, a New York consulting company, says he expects supply to tighten considerably in coming months. Mr. Ross, a formidable crude-oil counter in his own right, notes much of the oil on the seas set sail from the Middle East six weeks ago, before the agreement was reached, and there are far fewer ships behind the current armada. Mr. Ross, who prefers to measure based on the most recent pact, believes OPEC's output is down by 1.3 million barrels daily, or a 75% to 80% compliance figure.
"It's quite remarkable that they should have such good compliance for an agreement reached so late" in March, he says.
The remaining question is where oil prices will settle when world inventories come down, which most analysts expect later this year. William Brown III, president of W.H. Brown & Co. in New York, believes $19 or $20 a barrel is too high, even if inventories decline to late 1996 levels when the price was last this high.
In 1996, he says, producers were pumping at capacity and demand was strong. Now, he says, "OPEC has created surplus capacity and the market isn't willing to pay up that much when the extra barrel is readily out there to be produced."
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