October 23, 2006
Concerns by big consumers, doubts on cartel's ability to carry out cut
OPEC's deal to cut crude output by 1.2 million b/d sparked concerns October 20 in the US and Japan, the world's two biggest oil importers, and failed to stem the overall drop in crude prices, with the front-month contract on the New York Mercantile Exchange falling to an 11-month low.
Doubts on OPEC's ability to enact the promised cut was in part behind a plunge of $1.68/barrel in the NYMEX November crude contract, which settled at $56.82/barrel.
In Washington, Energy Secretary Samuel Bodman reiterated the need to reduce US dependence on foreign oil, while in Tokyo, Economy, Trade and Industry Minister Akira Amari called on OPEC to supply enough oil to meet global demand, adding that high oil prices had caused economic slowdown in many countries.
"Despite the recent downturn in crude oil prices, they remain at historically high levels, clearly indicating a global demand for petroleum products," Bodman said in a statement. "And as past experience has shown, market intervention is not beneficial for producing or consuming nations."
Japan's Amari noted there were "many countries around the world where economic growth has slowed due to soaring crude oil prices." He added: "The slow economic growth will eventually impact oil producers' economies so we would like OPEC member states [to pay more attention] to the impact of their decision on the world economy."
The response from analysts was mixed. Leo Drollas, deputy executive director of the Centre for Global Energy Studies in London, expressed doubt that OPEC compliance with its pledge to cut 1.2 million b/d of physical oil would be anywhere near 100%. Drollas noted OPEC production was already on a downward trend because of Saudi pricing policy, which has discouraged refiners from buying heavier crude grades. But, he said, "I don't believe they are going to deliver much more than 500,000 b/d in December and very little before that."
Deutsche Bank made the point that OPEC's track record on compliance with output cuts left a little to be desired. "What OPEC promises to do and what happens in reality have typically not converged," the bank said in a note.
However, it said that because "most OPEC members have benefited from a substantial improvement in their current account positions through higher oil prices ... they are likely to be keen to preserve this improvement."
Washington-based PFC Energy praised Saudi Oil Minister Ali Naimi's "orchestration" of the meeting. "From an initial press conference in the hotel lobby to the surprising decision to cut 1.2 million b/d from September production, Naimi sought to reassure markets that OPEC was still up to the task of managing world oil markets, and more significantly, that Saudi Arabia was still up to the task of managing OPEC," PFC said.
PFC said the agreement to cut by 1.2 million b/d rather than the 1 million b/d which ministers had flagged for the past two weeks was "crucial to the restoration of OPEC credibility" because the figure "sent a clear message to markets which had likely already factored in the possibility of a 1 million b/d cut."
OPEC ministers, meanwhile, declined to give either individual baseline numbers for the cut or new target output levels for each country. The official line is that OPEC is cutting 1.2 million b/d from a September production level of 27.5 million b/d and will produce 26.3 million b/d from the beginning of November.
OPEC President and Nigerian Oil Minister Edmund Daukoru, whose travel problems meant that he turned up in Doha just as the talks were ending, said the lack of detail was intentional. "The new target levels are entirely internal," he told reporters. "Each country knows unambiguously" what it has to do, he added. "We are expecting 100% compliance."
The new cuts have not been made on a strictly pro rata basis from September production. Four countries which have been facing problems with output or in fulfilling their nominal quotas this year -- Indonesia, Iran, Nigeria and Venezuela -- have shouldered a proportionally higher amount of the total than would have corresponded to their actual output.
Platts' analysis of the cuts and the output estimates published by OPEC suggests that in coming up with these numbers, OPEC appears to have used a mixture of secondary source estimates for some countries and figures for September output provided directly by other member countries. Below is a breakdown of the 1.2 million b/d cut, as provided by OPEC.