Squeezing The Opec Pipeline

Oil producers strike a deal that lowers prices--for now

And now we return to As the Oil Market Turns. In our last episode, finances of OPEC nations were sinking in a pool of excess oil. Then, on Mar. 22, Saudi Arabia managed to persuade fellow OPECer Venezuela and Mexico, not a member of the oil cartel, to curb production. According to the revised script, the trio will chop output by a combined 600,000 barrels a day, to begin with. But "we will surely reach the amount of 1.6 million to 2 million barrels a day," Venezuela Energy Minister Erwin Arrieta enthusiastically pledged. News of the proposed cutbacks reversed a four-month plunge in the price of crude, sending oil up nearly $2 a barrel.

But, dear listener, that's not the end of our story. Will the cutbacks really halt the plunge? Can OPEC enforce a reduction this time--a feat it has not pulled off since 1986? Could the fragile agreement be dashed by Iraq's pending U.N. oil-for-aid sales?

QUICK FIX. Count on months of intrigue ahead. In the short term, the deal may stabilize the price of crude at about $16 a barrel--up from its mid-March lows, but well below its 1997 average of $21. "This is a short-term palliative," says PaineWebber Inc. oil-watcher Frank P. Knuettel. "They want prices back in the upper teens; it isn't going to happen with this agreement."

Indeed, crude settled at $16.48 on Mar. 25 as traders calculated a more likely reduction of 1 million to 1.2 million barrels a day rather than the threatened 2 million. While still significant, the reduction comes as a seasonal slowdown is beginning: Demand for heating oil is waning and the summer driving boom is months away. On Mar. 24, the American Petroleum Institute reported that U.S. stocks of crude oil hit 326 million barrels, 1.5% higher than a week earlier and up 7% from levels a year ago.

Getting prices to rise and stay at higher levels would require measures few big producers seem willing to accept. In the current agreement for production cutbacks, Iran consented to a sleight-of-hand that trims 140,000 barrels off a quota it isn't near to achieving. Saudi Arabia's decrease of 300,000 barrels a day is less than half the 760,000-barrel production increase it approved last November. Plus, Venezuela says it will keep expanding capacity even as it pledges to lower daily production to 3.2 million barrels for the rest of the year.

Still, there are strong reasons for the oil-dependent trio to hold the line. Shrinking income from oil is forcing Mexico to slice spending by $3 billion, and Venezuela has chopped 6% off its government expenditures. Meanwhile, Iraq is poised to release up to 500,000 new barrels a day under the U.N.-orchestrated oil-for-aid program. "Longer term, that's going to keep the market from getting much above $15.50 a barrel," says Sarah A. Emerson, director of petroleum analysis and price forecasting at Energy Security Analysis Inc. Unless a Mar. 30 emergency OPEC meeting produces lasting cutbacks. Stay tuned.

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