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Cartel Conundrum - Views on News from Equitymaster
 
 
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  • Jul 20, 2000

    Cartel Conundrum

    The oil markets have see-sawed over the last few weeks ever since the Saudi Arabia oil minister, Ali Al Naimi, stated plans to unilaterally boost production by 500,000 barrels per day (b/d). He mentioned Saudi would go forward with its plan even if the Organisation of Petroleum Exporting Countries (OPEC) fails to boost production.

    The media has been filled with the various permutations that arise out of such a statement. To remove any confusion in the market OPEC President, Ali Rodriguez announced OPEC's plans to increase production by 500,000 b/d by the end of the month.

    However, the oil markets did not view this statement favourably as it implies a lower increment in production than expected. The markets were of the understanding that Saudi alone would boost production by 500,000 b/d while other countries would add to this increment resulting in an increase of more than 500,000 b/d.

    OPEC has also indicated that it will be re-instating the price band mechanism. This mechanism permits Gulf crude prices to fluctuate between a price band of $22-$28 per barrel. Crude output will be automatically adjusted if the price index of a basket of Gulf crude falls outside this band for a period of 20 consecutive business days. The prices breached the ceiling on July 3rd and the output will have to be increased if the prices remain above this level till July 28th.

    Production hike YTD
    Country April June Expected
    Algeria 54,400 22,656 16,000
    Indonesia 88,400 36,816 26,000
    Iran 248,200 103,368 73,000
    Kuwait 136,000 56,640 40,000
    Libya 91,800 38,232 27,000
    Nigeria 139,400 58,056 41,000
    Quatar 44,200 18,408 13,000
    Saudi 550,800 229,392 162,000
    UAE 149,600 62,304 44,000
    Venezuela 197,200 82,128 58,000
    Total 1,700,000 708,000 500,000

    Meanwhile Saudi has indicated its firm resolve to bring down crude prices to $25 per barrel levels and the move has been warmly welcomed by its close ally. In achieving its objective there are fears that Saudi might increase production beyond its stipulated quota. Such a move could impact the unity of the OPEC, which has been stable over the last two years. Further, a break-up could increase the volatility in the oil markets.

    In the latest increase announced only Saudi, United Arab Emirates (UAE) and Kuwait have surplus spare capacity to hike production. Consequently, not many members favour a production hike, as they do not stand to benefit. Therefore any unilateral move by Saudi will have negative consequences.

    If the oil markets are to return to stability it will require that all members agree and abide by the OPEC decision. The latest hike in production may not impact prices as:

    • The increase represents 0.7% of world daily consumption of 76 mbd.
    • The hike has already been factored into the future prices, which still hover around $30 per barrel for August delivery. Thus, prices seem to be unrelenting and for a decline in prices the production might have to be increased by more than 500,000 b/d.

    Thus, prices seem to be unrelenting and for a decline in prices the production might have to be increased by more than 500,000 b/d.

     

     

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