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Crude oil - Will the prices soften?

Jun 16, 2000

The eyes of all Central Banks and energy markets are focused on June 21, 2000. The date set for the Organisation of the Petroleum Exporting Countries (OPEC) meeting at Vienna to deliberate on whether or not to hike crude oil production.Despite the OPEC having increased the crude oil production from April 1st by 1.45 mb/d (m barrels/day) prices have reached the pre April levels. This maybe due to the continued worldwide economic growth, with the US economy growing and South East Asia making a come back.

With the rally in oil prices the OPEC developed an automatic price band mechanism whereby it would adjust production by 500,000 b/d should the 20 day moving average price move out of the band of $22-$28 / barrel. So can one expect prices to soften post Vienna meeting?

The prices have breached the above-mentioned band on the upper side over the past two weeks however the OPEC has failed to trigger the mechanism. Of the OPEC countries only Kuwait, Saudi Arabia and UAE out of the 11 members are in favour of a production hike as it is only these countries that have spare output and will be the only beneficiaries of the hike, thus they stand in minority. Further, analyst are of the opinion that an increase of 500,000b/d will be insufficient to affect prices and an increase of 1mb/d is required. Finally, if one looks at the futures market, crude oil futures for July are trading at $33/ barrel levels; these prices have discounted the likely outcome of the meeting and are indicating that production will not be hiked.

Thus it is very likely that the meeting at Vienna will disappoint all those who are expecting and wanting the prices to soften. India is one of them as high crude prices will not do good to our trade deficit figures and will adversely affect the oil pool account which is already threatening to breach Rs 130 bn levels.

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