OPEC boosts oil output in spring, easing prices
By Bruce Stanley
LONDON (AP): By scaling back its oil output in March, Organization for Petroleum Exporting Countries (OPEC) sent petroleum prices skyrocketing to more than twice the levels they languished at when the year began.
Some industry analysts are predicting now that OPEC will soon boost production -- thereby providing relief for consumers smarting at higher costs for everything that depends on the price of oil, from gasoline to airplane tickets.
The OPEC may have lost some clout since the 1970s, when it tipped Western economies into recession by twice jacking up crude prices. But the group's control over almost two-fifths of global oil output ensures that it still has a heavy hand in global markets.
OPEC has impressed many observers by curtailing its daily production by 2.1 million barrels, or 2.6 percent of the global supply, and sticking to those cuts in an effort to soak up excess supplies and buoy prices from 12-year lows.
The strategy is "biting hard," says Peter Gignoux, senior petroleum analyst at Salomon Smith Barney Citibank.
Together with a rise in seasonal demand for heating oil, particularly in Europe, OPEC's discipline helped push prices for futures contracts of North Sea Brent to a year-to-date high of US$25.90 per barrel on Nov. 22. That's 162 percent more than what Brent cost at its low point for the year -- $9.90 on Feb. 17.
On Nov. 30, the price of unleaded gasoline hit $1.20 per liter ($4.56 per gallon) in Britain, and heating oil sold for 80 U.S. cents per liter ($3.04 per gallon) in Italy.
Retail price inflation has risen by as much as 0.2 percent as a direct result of more expensive crude, said Hung Tran, chief economist at Rabobank of the Netherlands.
However, Iraq's suspension on Nov. 24 of its 2.2 million barrels in daily exports has created great uncertainty about where prices will go from here. So too have the possibilities of a cold winter and stockpiling of oil supplies by importers concerned that the Y2K Millennium Bug might interrupt shipments.
"We're going to see continued volatility," says George Beranek, an analyst at the Petroleum Finance Company in Washington.
After the UN Security Council voted Dec. 10 to extend the oil- for-food program for six months, which allows Iraq to sell $5.26 billion in oil to buy humanitarian goods, Baghdad announced it will stick to the previous rate of about 2.2 million barrels a day. Iraq said it would resume exports in the second half of December.
In the worst case scenario, prices could spike to $30 a barrel, says Leo Drollas, chief economist at the London-based Center for Global Energy Studies.
Yet OPEC faces a dilemma if prices continue to rise.
Export earnings would benefit all oil producers, but some OPEC members might cheat on their quotas to earn still more, and non- OPEC producers might boost production as well. The combination would heighten the risk of a supply glut and a crash in world prices.
Group members have insisted they won't increase daily production until their oil ministers meet again in March.
"But we're beginning increasingly to get signs that some OPEC members are regarding an oil price of over $25 as dangerous," says Paul Spedding, an analyst at the investment bank Dresdner Kleinwort Benson.
OPEC is widely expected to approve some increase in output at the March ministers' meeting. The challenge, analysts say, is for its members to manage any increase in an orderly way.
One problem is that seasonal demand for oil historically ebbs in the spring, making it a tricky time to put additional barrels on the market.
Spedding predicts that prices will ease to less than $20 a barrel after March and settle to an average of $17 for the year 2000.
Barney Gray of the London brokerage Williams De Broe foresees a higher average price of $19 a barrel.
"But what we need," Gray says, "is stability."