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Energy: Where is oil headed? - Views on News from Equitymaster
 
 
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  • Jan 4, 2002

    Energy: Where is oil headed?

    After the initial surge in oil prices, post September 11, the markets experienced considerable weakness with prices of the commodity declining by an estimated 30% to $18/ barrel. The market administrator, the Organisation of Petroleum Exporting Countries (OPEC), was caught in a catch-22 situation. While the weakened global economy applied downward pressure on prices the cartel could not counteract with adjusting production due to military action against Afghanistan.

    With military operations nearing successful completion, the cartel, leveraging on the risk of oil prices touching '98 levels of $10/ barrel, negotiated with key non-OPEC producers to carry out a unanimous production cut. OPEC agreed to cut output by 1.5 m barrels/ day (mbd) provided non-OPEC producers (Russia, Mexico, Norway, Oman & Angola) took out 0.5 mbd from the market. Support for action did not come easy. However, after several rounds of negotiations, non-OPEC producers agreed to cutback production by 452,000 barrels/ day.

    OPEC announced its decision to cut output on December 28, 2001 with effect from January 1, 2002. Non-OPEC producers over this week have followed suit with Russia and Mexico announcing their quota of production cuts. Russian exploration & production (E&P) companies are not to supportive of the Government move to cut production by 150,000 barrels/ day, as they believe the economy & companies are strong enough to take on an oil price war. That said, industry watchers do not believe the cuts to last beyond the first quarter of 2002. Also, this period coincides with the seasonal decline in demand.

    Mexico has decided to cut production by 100,000 barrels/ day, while the other three producers are yet to announce their share of production cuts. The Mexican economy depends considerably on oil exports. The Government fears that low oil prices could significantly impact revenues. On the other hand, higher prices could delay a turnaround in the U.S, which is the country's largest trading partner. The reduced production is in relation to the target output for 2002 and not an absolute cut from 2001 levels.

    With these announcements Brent crude prices moved to $21/ barrel. However, are the cuts an eyewash to maintain cordial relations with the cartel or is it for real?

     

     

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