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OPEC Pres Scrambles To Broker Output Cut Agreement

Source: www.gulfoilandgas.com 10/6/2006, Location: Europe

OPEC's president is scrambling to broker an agreement among the cartel's members to cut oil output, in an attempt to shore up tumbling crude prices. But contentious issues need to be resolved before ministers of the Organization of Petroleum Exporting Countries reach an agreement.

Still, OPEC's attempt to orchestrate an output reduction is raising alarm bells in major consuming countries. Crude prices have dropped 22% since hitting a nominal record high of $77.03 on July 14, 2006, but at nearly $60 a barrel, petroleum remains more than twice as expensive as it was three years ago. By talking about tightening the spigot now, OPEC is signaling that it will try to prevent prices from falling further, even if demand for oil slackens as the world economy slows.

Oil prices went on a roller-coaster ride Thursday on the New York Mercantile Exchange. Crude oil for November delivery settled up 1% at $60.03 a barrel after earlier trading as high as $60.97.

After hours of confusion about whether OPEC had or hadn't already cut a deal, Edmund Daukoru, the Nigerian oil minister who is also OPEC's president, indicated that the cartel still had a ways to go. "We are toying with the idea of an emergency meeting" that would seek an elusive consensus, he said, according to The Associated Press.

Earlier reports by several news organizations had said that OPEC had reached an agreement to cut output by 1 million barrels a day, or a little under 4% of the cartel's current production of some 27.5 million barrels a day. But Daukoru dismissed these claims. Instead, he said, the cartel is hashing out contentious details.

"We agree that something needs to be done," Daukoru said, referring to output cuts. But "we will have to agree on how much, how soon and how we distribute (the reduction) among member countries."

Under the plan being mooted by some in OPEC, the cartel would slash its oil output by as much as 1 million barrels a day from current production levels, and each member would cut their output by a similar percentage.

Some Members Seen Resisting, But some members - especially those whose production is lagging - are resisting. There is no agreement on when such a cut should be made.

Critically, not everyone agrees on how the cuts should be shared, which has been a major stumbling point in past negotiations about market shares.

The reports that OPEC was seeking to withhold oil from markets ahead of the peak winter heating season alarmed major consumers, who are just beginning to breathe a sigh of relief as oil prices swooned in recent weeks.

Jean-Claude Trichet, president of the European Central Bank, told reporters in London that an OPEC decision to cut output might damage the global economy by artificially boosting energy prices. In the U.S., the world's largest oil market, a spokesman for Energy Secretary Samuel Bodman said the U.S. energy czar had urged some OPEC ministers to keep crude markets well supplied. "...At $60 a barrel, it's still among the historically high prices for crude," the spokesman told DJN.

Despite the risk of a backlash, OPEC officials privately say the cartel is even more fearful of a price rout. They say that swelling commercial inventories of oil, and rising oil production in countries that don't belong to the cartel, could lead to an uncontrollable slide in oil prices in the months to come.

"We are not trying to set a floor at $60" a barrel, one senior OPEC official said. This official also asserted that OPEC was nearing an agreement on output cuts.

Even if OPEC can't reach a deal right away, it has other options.

To quickly support prices, OPEC could fudge the issue of market share by not announcing output allocations for each member country. Under that scenario, the cartel could announce a big cut, then work out the shares later.

In any event, many industry officials expect the bulk of the cuts will have to come from the strongest producers, those who have spare oil-pumping capacity: Saudi Arabia and neighbors such as Kuwait and the United Arab Emirates.

At a meeting last month in Vienna, OPEC effectively abandoned its previous quota system. The shares had become outdated as some countries like Algeria, Saudi Arabia, and Libya have increased their production capacity in recent years, while others, such as Venezuela, Iran and Indonesia can't even produce enough to use up their allocations.

Now, countries whose production capacity has grown want new quotas to reflect these changes, giving them a bigger share of the pie by reducing the shares of others.

OPEC officials said Saudi Arabia, the cartel's largest exporter, was willing to reduce its output in line with its current share of about a third of the total produced by 10 member countries, leaving out Iraq. But countries like Venezuela, Iran and Indonesia are loath to give up their shares, even if they are unused. Complicating this contentious issue are special cases, such as Nigeria's low production levels because of domestic violence, not because of capacity limitations.

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