VOL. XLVI

No 39

29-September-2003
 

OPEC

OIL PRICES

Crude Prices Rise More Than $1/B On Surprise OPEC Quotas Cut

Crude prices rose by more than $1/B on 24 September, after OPEC ministers meeting in Vienna announced a 900,000 b/d reduction in total production quotas beginning on 1 November. The quotas cut was announced at a time when the price for OPEC Basket crude appeared to be settling around the center of the organization’s $22-28/B target band for the first time in months. The announcement took market analysts – who had unanimously predicted another rollover of quotas – by surprise, and traders bought crude in anticipation of a tighter supply-demand balance in 4Q03. While OPEC expected Iraq’s exports to continue rising into 4Q03, the OPEC decision was understood to be predominantly a reaction to recent rises in commercial inventories, which it views as a symptom of weaker than anticipated demand.

Consumers greeted the OPEC decision with dismay. On 24 September IEA Executive Director Claude Mandil told reporters he was disappointed with a decision which could harm global economic growth: “Given the continued weakness of the world economy, OPEC's strategy to maintain prices at persistently high levels cannot contribute to a sustained recovery and a return to global economic growth.” A White House official stated the US belief that crude prices should be determined by market forces, while on 25 September President George W Bush told reporters: “My reaction is that I would hope that our friends in OPEC don’t do things that would hurt our economy.”

The most recent IEA monthly report said that the industry may need to rethink what it considers to be  minimum operating stocks levels, noting that refiners were comfortable with record low crude inventories last winter, despite the knowledge that the US was preparing to invade Iraq. The report also noted a 1.23mn b/d increase in OECD commercial inventories during 2Q03 and a 1.03mn b/d rise during July (MEES, 15 September). Recent US weekly stocks data – widely taken as an indicator of broader OECD stock trends – have shown further crude inventory rises, and last week’s reports on 24 September followed the pattern. The API reported an 800,000 barrels rise in crude inventories in the previous week, with a 1.1mn barrels rise in gasoline and a 300,000 barrels fall in distillates. The EIA disclosed a 1.5mn barrels increase in crude stocks, with a 1.5mn barrels increase in gasoline and a 100,000 barrels draw on distillates.

The EIA warned against placing too much reliance on preliminary stocks data, which is subject to revision. In its This Week In Petroleum report of 24 September, the EIA wrote: “With EIA’s monthly petroleum supply data for July 2003 released yesterday, some oil market analysts will take the latest monthly data for inventory levels and adjust the weekly data accordingly. For example, the monthly data for July showed that commercial crude oil inventories were 3mn barrels more than what was estimated based on the weekly data. So, some analysts would like to conclude that the weekly data released today are underestimating crude oil inventories by 3mn barrels. However, it has been our experience that while this may sound logical, it is not statistically valid, as the revisions from the weekly to the monthly data vary from month to month and show little or no systematic pattern.”

In the Global Energy Wire report of 24 September, Deutsche Bank analyst Adam Sieminsksi observed: “After a strong rise in 3Q03, we now expect OECD inventories to fall 400,000 b/d in 4Q03 to support a $25/B Brent price throughout the winter quarters. The call on OPEC should fall seasonally in 2Q04, and OPEC will have to consider further cuts at their next meeting – now set for 4 December – especially if the Iraqis manage to get the export pipeline to Ceyhan consistently operating. When the OPEC ministers arrived in Vienna, they were confronted with several analyses pointing to a relatively loose supply/demand near-term picture that could have lead to a 300,000-400,000 b/d inventory build in 4Q (a quarter when inventories normally fall by that much). Strong non-OPEC and OPEC NGLs sequential supply growth adds to the inventory projection.”

Settlement Prices For Benchmark Crudes ($/B)