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OPEC stays course, oil may stay high
02.06.2006
14:00:27, AFX Europe Focus
Despite lobbying by Venezuelan President Hugo Chavez for
a production cut, OPEC decided to keep pumping almost as much oil as
it can for now, but the move may have little impact on soaring oil prices and
didn't ease concerns that the global economy could be damaged.
The agreement to keep crude production steady, reached Thursday by OPEC oil
ministers meeting in Caracas, will do little to ease prices that are being
driven by "violence in Nigeria and Iran's nuclear ambitions" said Fumiaki
Watari, president of Nippon Oil, Japan's largest oil company.
But the Organization of Petroleum Exporting Countries doesn't factor the
implications of such conflicts into its decisions about worldwide oil supplies,
OPEC President Edmund Daukoru told reporters Thursday after the group made the
decision.
"We don't model Armageddon," Daukoru said.
The group, which produces more than a third of the world's oil, instead
tries "not to get drawn into this kind of situation."
Daukoru added that current oil market conditions suggested there was no need
for OPEC to meet again before its scheduled Sept. 11 meeting in Vienna this
year.
"Stock levels are on the high side, gasoline stocks are on the low side, and
the market looks as though it's balanced," said Daukoru, who is also Nigeria's
oil minister.
But Daukoru said tightness the market is currently experiencing, "may well
continue into next year."
Several OPEC ministers voiced concerns about rising global inventories and
suggested that the cartel's 28-million-barrel-per-day quota might need to be
trimmed later in the year if demand weakens.
In an official statement, OPEC said it maintains a "readiness to act swiftly
... to safeguard the interests of member countries."
Yet for the time being OPEC put aside these longer-term issues to focus on a
more immediate problem: $70-a-barrel oil.
Qatari Oil Minister Abdullah al-Attiyah made clear that "at this price
level, OPEC won't cut production."
While high oil prices mean big profits for oil producers in the near term,
the longer-term risk is that they could cause a drop-off in economic growth and
spur the development of alternative energy sources.
Most OPEC members "don't want to send any signals to the market that there's
a floor at $70," said Yasser Elguindi, senior managing director at Medley Global
Advisors.
The cartel could face a more difficult decision in the second half of the
year if inventories continue to build and global economic growth slows, said
Michael Lynch, president of Winchester, Mass.-based Strategic Energy and
Economic Research.
"That can really accelerate weakening prices," he said.
In an apparent attempt to head off this possibility, Chavez, a longtime
price hawk, suggested trimming production now and repeated calls for OPEC to
establish a minimum price of $50 a barrel.
Chavez said an appropriate upper-end for prices would be "infinity."
Nigerian petroleum minister Edmund Daukoru said Chavez' idea was not
formally proposed to OPEC, so it wasn't considered.
Crude prices slipped on Friday, but still hovered above $70 a barrel on the
New York Mercantile Exchange. On Thursday, Iran's foreign minister welcomed the
idea of direct talks with the United States over its nuclear program, but
rebuffed the U.S. condition that Tehran first suspend uranium enrichment.
In spite of some concerns about slowing demand growth, oil prices are not
expected to collapse anytime soon, analysts said.
Daily global demand is expected to average nearly 85 million barrels per day
in 2006, and the world's producers are believed to have less than 2 million
barrels per day of excess production capacity that could be called upon in the
event of a supply disruption. Moreover, this surplus is made up of lower quality
crude oils for which there is scant available refining capacity, analysts said.
This thin supply cushion has left the market extremely nervous about any
threats to output, such as the West's diplomatic standoff with Iran, the war in
Iraq, violence in Nigeria and the Gulf of Mexico hurricane season.
"The market is precariously balanced," said Lawrence Goldstein, president of
the Petroleum Industry Research Foundation, a New York-based industry-financed
think tank.Oil gains; market sceptical over US
offer for talks with Iran
02.06.2006 13:02:19, AFX Europe Focus LONDON (AFX) - Oil prices continued higher, reversing two days
of falls, as
traders become increasingly sceptical about a US offer to join direct talks with
Iran over its nuclear programme.
Added to this are concerns over last week's jump in gasoline demand in the
US, which on Monday officially entered the peak demand summer driving season,
and over outages at two US refineries in Texas.
Further, analysts said OPEC's widely anticipated decision yesterday to keep
production levels unchanged was failing to weigh significantly on prices, as the
cartel's ability to move the market is more limited these days.
At 11.34 am, July-dated Brent contracts were up 46 cents at 69.85 usd, after
dropping 1.02 usd to close at 69.39 usd yesterday. Meanwhile, July-dated US
light crude futures were up 58 cents at 70.92 usd.
"Scepticism over the Iranian dispute abounds and the firm tone to the market
is likely to prevail. Expect crude to push through 72 usd over the next few
sessions," said Bank of Ireland analyst Paul Harris.
Prices fell on Wednesday after the US, in a major policy shift, said it was
ready to join the UK, France and Germany in direct talks on Iran's nuclear
programme if Tehran suspends uranium enrichment activities.
Iran, however, rejected the offer, saying it was ready to talk to the US
over "mutual concerns" but that its "natural right" to uranium enrichment is not
up for negotiation.
"In order to... achieve some element of support from China and Russia, the
(US) offer was one that was perhaps almost forced," said Barclays Capital
analyst Kevin Norrish.
He added that "unless Iran backs down on enrichment fairly swiftly, and at
the moment we consider that unlikely, then this could be seen as another box
checked on the list that points towards a military solution."
The five permanent members of the Security Council plus Germany have reached
agreement on a package of incentives aimed at urging Iran to halt uranium
enrichment, which can be extended to make nuclear weapons.
The market is concerned the dispute may cause Iran, the world's fourth
largest crude producer, to withhold oil sales in retaliation for any UN action
against it.
It is also worried over US gasoline demand and over the Atlantic hurricane
season, which officially began yesterday, and which could wreak havoc on oil
installations in the US Gulf Coast, as it did last year.
US gasoline demand jumped to 9.43 mln bpd last week from 9.19 mln the week
before, the Energy Information Administration said yesterday in its weekly
inventory report.
The EIA also reported a rise of 0.8 mln barrels in gasoline stocks, which
have now risen for five straight weeks, but analysts said the market chose to
focus on the spike in gasoline demand.
Further, news that Valero Energy Corp cut gasoline output by 50,000 bpd
after a fire at its Corpus Christi refinery, while Citgo Petroleum Corp had to
restart a gasoline unit following a power outage, also supported the market.
Bank of Ireland's Harris said the fact that the news got so much play "shows
how much nervousness there is in the market and how narrow the gap is between
supply and demand".
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