Amid the Slide, OPEC Holds Steady

The recent fall in crude prices won't affect policy, say group officials. But the second quarter may be a different story

The early December plunge in oil prices has been dizzying. Crude fell by more than $3 per barrel in London trading on Dec. 1 -- the biggest one-day slide since September, 2001 -- and dropped an additional $2 on Dec. 2, closing at $43.25 on the New York Mercantile Exchange. Prices are currently some $12 lower than they were in late October.

You'd think OPEC officials would be scrambling to trim output in response. But the cartel is keeping its cool, at least for now. Indeed, on Dec. 2, OPEC's Indonesian president, Purnomo Yusgiantoro, said the group is likely to roll over its current 27 million barrel-per-day crude output ceiling when ministers meet in Cairo on Dec. 10.

OPEC members want to "see where oil prices are in January and February before making any adjustments," Purnomo said. OPEC feels oil prices will remain high in the first quarter of 2005 due to geopolitical factors. However, in the second quarter, prices will be lower as demand is expected to fall, according to the OPEC chief. Purnomo also indicated that any adjustments to the ceiling were unlikely before OPEC's March 16 meeting in Iran.


  Algerian oil minister Chakib Khelil says an output cut would be premature and that his country would not encourage such a move. "The majority of OPEC members want market stability. Everyone is producing at full capacity and I think it would be too premature to cut production [and] we do not encourage it," Khelil says. Algeria thinks demand is going to be as strong in the first quarter of next year, he says.

But actual OPEC output is running at considerably higher levels than the official ceiling, according to independent estimates. Oil consultants PetroLogistics said on Dec. 1 that production from the 10 OPEC members with quotas averaged 28.3 million barrels per day in November -- 1.3 million above the official ceiling. Purnomo has estimated that there is 1.5 million barrels per day of oversupply.

OPEC has largely ignored its official ceiling and quotas this year as oil prices have soared. "Quotas now are only a concept," says Nigerian presidential petroleum adviser Edmund Daukoru.


  But despite Purnomo's expectation that crude prices will remain high through the winter, the volatile swings of the past few weeks have set alarm bells ringing in some quarters of OPEC, prompting some officials to suggest that the group should start thinking about trimming output.

One of OPEC's biggest problems is the wide $10-per-barrel differential between light sweet crude of the type produced by Nigeria and the heavier, more "sour" variety that makes up the bulk of OPEC's Middle East production.

Saudi oil minister Ali Naimi said in late November that while the high prices were largely the result of strong demand for crude, the market's thirst was greater for light sweet crudes than for heavy sour grades. Saudi Arabia has been increasing refinery throughputs of its own heavy sours in order to release more of the lighter grades for export, Naimi said.


  And in a move that appeared to illustrate the difficulty of selling sour crudes, Iran took the unusual step on Dec. 2 of making a further cut in its November crude prices for Mediterranean customers, slashing prices by more than $3 per barrel. Tehran had already cut November crude prices by around $2 to $3 from October levels.

Still, says Algeria's Khelil, "prices are good" and above OPEC's target range of $22 to $28 per barrel. "When we get to $30 a barrel," he adds, "we'll start getting worried."

For now, the cartel doesn't seem to be breaking a sweat. And Western energy officials appear equally sanguine. Claude Mandil, executive director of the International Energy Agency, says: "I hope that they will be wise and let [crude oil] stocks be rebuilt to adequate levels. So far, they have proven to be wise." But the specter of a continued slide in crude prices may convince the cartel that keeping output at current levels may be folly instead of wisdom.

From Platt's OilGram

London-based Platt's reporters Margaret McQuaile, Jacinta Moran, Anita Nugraha, Michael Rieke, and Lies Sahar contributed to this report

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