Friday, March 03, 2006

Venezuela winning the battle to set OPEC policy 

There has always been tension within OPEC over how aggresive the cartel should be in trying to boost prices. Currently Venezuela and Iran are price hawks argueing for production cutbacks to ensure continued high prices. Saudi Arabia and Kuwait have generally been very sensitive to U.S. concerns about prices and have sought to increase production when the U.S. insisted on it. It appears that Iran and Venezuela may be getting the upper hand:

OPEC President Edmund Daukoru said on Friday that the global oil market is oversupplied by about 2 million barrels per day.

"The market is indeed well supplied with crude today," Daukoru told an audience at the National Press Club in Washington, ahead of next week's meeting of the Organization of the Petroleum Exporting Countries.

Daukoru's view that the global market has plenty of crude oil differed with that of the United States, the world's biggest oil consuming nation, which believes the market needs more oil.

U.S. inventories of gasoline, which account for 40 percent of America's daily oil demand, are the highest since June 1999 and Daukoru has said those big stocks will be a factor at next week's OPEC meeting.

U.S. Energy Secretary Sam Bodman said he does not know what OPEC ministers will decide about their production levels when the cartel gathers in Vienna. However, Bodman said during his meeting on Wednesday with Daukoru that OPEC's oil was needed based on high prices.

"I expressed the view that as best I could tell the markets were calling for more, not less, oil," Bodman told reporters in a briefing earlier on Friday.

Even though crude prices have stayed high, Bodman said there are no signs the global economy is "suffering in any major way" due to oil costs.

This sort of news tends to fly under the radar, even in Venezuela. Yet it is vitally important. Oil revenues consitute about 80% of Venezueala's export earnings and 50% of its governments budget. So the price of oil is the determining factor in how Venezuela's economy does. And that price can fluctuate wildly based on small imbalances in supply and demand. One of energy minster's Rafael Ramirez's most important functions is monitoring world petroleum supplies versus demand very carefully and making sure OPEC is pro-active in avoiding oversupply. Then he has to work hard to ensure that other OPEC members are in agreement on the needed cutbacks. This is not any easy job and the consequences of failure can be severe for Venezuela. Fortunately, from this, with the head of OPEC even seeing markets as oversupllied, it looks like he is on top of the situation.

UPDATE Here is a confirmation of the necessity of OPEC cutting back production by between 500,000 and 1,000,000 barrels a day from an rather suprising source:

Una perspectiva del mercado petrolero
Luis Giusti
El Nacional

Durante el año 2005 la demanda petrolera mundial aumentó en 1,3%, equivalente a 1.100.000 barriles por día (BD), en marcado contraste con el año 2004 cuando ese aumento fue de 3.000.000 BD (3,7% ). Sin embargo, los precios del petróleo, que habían aumentado en 30% en 2004, saltaron en 40% el año pasado. La explicación principal está en que el ritmo de aumento de la producción no-OPEP se estancó durante 2005, lo cual implicó que la demanda incremental apenas si pudo ser cubierta por la OPEP produciendo 30.300.000 BD, casi a máxima capacidad.

El Centro de Estudios Globales de Energía en Londres anticipa que durante el corriente año la demanda petrolera aumentará en 1.300.000 BD (1,5% ). Al sumar los nuevos barriles no-OPEP que se planifica incorporar durante el año, se obtiene un total de 3.000.000 BD, lo cual generaría un alto excedente de suministro que aflojaría los precios. Pero la restauración de la producción diferida en el Golfo de México por los recientes huracanes ha sido muy difícil y aún se mantiene en 400.000 BD, en adición a 450.000 BD diferidos en Nigeria por conflictos internos y 200.000 BD en Irak por razones similares. En consecuencia, CGES calcula que el suministro no-OPEP reanudará su crecimiento en 2006, pero en la modesta cantidad de 1.000.000 BD (2% ). Aún así, la OPEP tendría que reducir su producción a 29.300.000 BD en promedio para el año (una reducción de 1.000.000 BD), si desea que los inventarios no aumenten de los actuales niveles. Sin embargo, con la demanda mayor que la oferta en 600.000 BD durante el primer trimestre, los precios se mantendrán altos durante todo el primer semestre (crudo Brent en 61 dólares por barril). Pero llegado el tercer trimestre los inventarios habrán alcanzado 77 días de cobertura, lo cual aflojará los precios. Si la respuesta de la OPEP fuera un recorte hasta unos 29.000.000 BD, los precios no caerían por debajo de 50 $/B durante el segundo semestre.

Unfortunately I am a little under the weather right now and don't have the energy to translate this. But the point this person makes, is that non-OPEC sources coming on line this year a likely to slightly outpace the increased global demand for oil. So, in the authors estimate, if OPEC want to keep prices near were they are today it needs to cut a million barrels off its quota. And who is the person making this astute observation that confirms the position of Venezuelan oil minister Rafael Ramirez? None other than Luis Giusti, who as PDVSA president prior to Chavez coming to power, always advocated maximizing production, prices be damned. Why the change of heart? Don't know. Maybe it isn't one. Maybe this is just an analysis but now what he would actually do if he was back in power. Or maybe that he no longer benefits personally from PDVSAs unchecked growthed and can analyze things more objectively he comes to the conclusion that Chavista oil policy is pretty good after all.


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