Jittery Opec stays its hand on oil prices

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Friday, September 1, 2000 Jittery Opec stays its hand on oil prices

LONDON: Barriers created by topsy-turvy petroleum economics and politics at the impending Organisation of Petroleum Exporting Countries (Opec) summit are seen as blocking bold action to tame runaway oil markets. According to analysts, worries about how to leap those hurdles unscathed lie behind a cautious Saudi statement at mid-week that the oil superpower would work with Opec for a rise in output to stabilise prices.

Lack of detail in the kingdom's first oil policy statement in months came as little surprise to analysts tracking the cartel's halting attempts to ease prices at decade highs.

High on the list of economic deterents, they believe, is the risk of a price collapse that Opec fears might be set off by any attempt to flood the world with oil to deflate feverish values.

And a more modest output rise may prove impotent against a backwardated price structure that values prompt oil over later-loading oil and thus deters buying and storing of petroleum.

"Opec should raise output to help rebuild stocks but whether it will oblige is uncertain, since too many members fear a price collapse,'' said London's Centre for Global Energy Studies.

In any case, priorities of prestige and cartel unity mean Opec wants to shield markets against a slump to allow its heads-of-state summit next month to bask in the glow of firm prices.

And many in Opec, hobbled by debt accumulated since their boom years of the 1970s, remain desperate for every petrodollar.

Analysts expect US President Bill Clinton will have much to say about expensive energy when he meets Saudi Prince Abdullah next week following agonised consumer complaints about high fuel costs.

The Saudis have their own concerns about high prices--among them the damage high prices could do to oil demand growth and the spur they provide to rival non-Opec output. But logjams in the supply chain from the desert wellheads of Opec to US gasoline pumps and storage tanks mean the cartel is already struggling to market extra fuel on commercial terms.

The paradox of a tight refined products market in parallel with backwardated crude prices was that low petroleum inventories did not automatically call forth extra supply, experts said.

The problem has become apparent with the difficulty Saudi Arabia has faced in placing its crude on the market at short notice.

In such circumstances, simply throwing extra cargoes at reluctant refiners could prove to be a blunt instrument.

"The risk of the price overshooting on the downside would be very great,'' said an executive experienced in Opec negotiations. "The only way you can break the backwardation is to make a clear announcement of radical action to increase production and at the same time to discount physical oil.''

"But the Saudis are not prepared to discount prompt deliveries and I don't blame them. They have done that two or three times in their history and it has always been disastrous,'' the executive added.--Reuters

http://biz.thestar.com.my/news/story.asp?file=/2000/9/1/business/01b07ope&sec=business http://biz.thestar.com.my/news/story.asp?file=/2000/9/1/business/01b07ope&sec=business

-- Martin Thompson (mthom1927@aol.com), August 31, 2000


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