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Energy: Uncertainty abounds…

Mar 9, 2001

Uncertainty seems to be omnipresent currently. Besides the volatility on the domestic bourses the world oil markets are also on tenterhooks. The Organisation of Petroleum Exporting Countries (OPEC) meet on March 16th to decide on their production policy. The OPEC had earlier cut production by 1.5 m barrels / day (mbd) in mid January, which came into effect on February 1st. This was done on the fear of that oil markets could slip into an over supply position. The current volatility could be due to the speculation on what policy the cartel will adopt in its next meeting. However, based on the comments of OPEC spokespersons, only the magnitude of the cut is in question as most members favour a production cut. Saudi (8.4 mbd) and Iran (3.8 mbd), the cartel's largest producers, have also hinted their support to a cutback in production.

The OPEC is apprehensive that as the Northern Hemisphere shifts out of the winter months (high consumption period) the demand for fuel is likely to fall. Also, the slowdown and fear of possible recession in the largest oil-consuming nation, U.S, which could pull down demand further has added to the cartel's worries. Fearing a glut in the oil markets the OPEC is attempting to create market equilibrium and consequently maintain price stability. Further, it is attempting to prevent a slide in oil prices to 1998 levels.

Oil prices recovered only in 1999 after having collapsed to 20-year lows of $10 per barrel in 1998. This adversely affected oil-producing nations, which cut back on production to revive oil prices. However, by mid 2000 oil prices were soaring and to bring some sobriety into the markets the OPEC hiked production by 3.2 mbd. U.S too released 30 m barrels of oil from the Strategic Petroleum Reserve (SPR) in the month of October to tide over the supply shortfall. The OPEC is afraid that the increased production could collapse oil prices as world oil demand weakens.

Under the OPEC pricing mechanism, prices of a basket of crude are targeted between $22 / barrel to $28 / barrel. If prices deviate from this range for 20 consecutive working days the OPEC will undertake necessary adjustments in production. As per reports, the OPEC is said to be comfortable with oil prices at $25 / barrel.

Turmoil seems to have engulfed markets and March seems to be a season of cuts. The OPEC meets on March 16th followed by the U.S Fed on March 20th for a possible rate cut. However, the cuts are an ominous sign of economic slowdown and anxiety could grip markets on a possible global recession.

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