Opec fails to act

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Opec fails to act as average crude price breaches $28/bbl By Matthew Jones Published: June 8 2000 16:56GMT | Last Updated: June 9 2000 07:31GMT

World oil markets were thrown into confusion on Thursday when the Organisation of Petroleum Exporting Countries failed to lift output, despite the 20-day average price of the basket of Opec crudes breaching $28 a barrel.

Opec ministers made an informal pact in March to raise or lower output by 500,000 barrels a day if the 20-day average price moved outside the $22-28 a barrel range. On Wednesday Opec figures showed that the simple moving 20-day average of price of crude oils reached $28.08 a barrel.

But Ali Rodriguez, Venezuelan energy minister and current Opec president, on Thursday said an output increase would not be automatic.

"We have to be extremely cautious before taking this decision," he said in a television interview. "We have to observe if this is a short term phenomenon or if it will be sustained."

That the price band mechanism was shrouded in uncertainty had been pointed out by some industry observers. Writing for FT.Com, Robert Priddle, executive director of the International Energy Agency said this week that: "Even the Opec basket price is not transparent... The text of the 'gentleman's agreement' has never been formally released. So it is unclear whether the trigger for adjusting targets is 20 days of the daily average price or a 20-day average (or even 20 days of the 20-day average). The daily average came close to $22 in April and exceeded $28 in late May, as yet without prompting any action."

Analysts are critical of Opec's failure to clarify its policy and said the uncertainty was causing nervousness among traders.

"As soon as they get to the moment of judgment and truth the rules seem to change," said Peter Gignoux, head of the petroleum desk at Salomon Smith Barney in London.

Mr Gignoux added that it was still not clear to the market whether any output increase would be simply formal recognition of the cheating of production quotas or whether it would be new production volume.

Leo Drollas, deputy director of the Centre for Global Energy Studies, said the fact the price band had been breached at the upper limit had caught Opec members unaware.

"When the mechanism was agreed they thought an increase in output would be triggered by the price hitting the floor rather than the ceiling of the price band," he said.

He added: "We think there is a 60 per cent probability that there will be an output increase but it is by no means certain."

Mehdi Varzi, director of oil and gas research at Dresdner Kleinwort Benson, said it would have been a mistake for Opec to abandon a conscious decision-making process and that the decision could now be postponed until the forthcoming Opec meeting on June 21 in Vienna.

He said a large output increase was unlikely to be agreed because of signs that high prices were beginning to slow demand in the Organisation of Economic Co-operation and Development countries.

"Until there is an output increase the oil price will continue to rise in the near term. But whatever Opec does I certainly see a more balanced market in the second half of the year," he added.

In late afternoon trading on Thursday, the July contract for Brent blend crude on the International Petroleum Exchange in London was 18c up at $29.40 a barrel.

http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3HU8XM89C&live=true&useoverridetemplate=ZZZFKOXOA0C&tagid=ZZZCWHK1B0C&subheading=energy

-- Martin Thompson (mthom1927@aol.com), June 09, 2000


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