Oil Wars

Many in the international and Venezuelan press are trying to trumpet the failure of the recently concluded OPEC summit to call for quota and output reductions as a setback for Venezuela and Iran. Those two countries had been warning about growing oil inventories and the risk of a price collapse unless production was cut back. But, according to most of the press, "moderates" such as Saudi Arabia had prevailed upon the organization not to cut back production in the face of still quite high oil prices. Or so it is said.

The reality of what is being done is apparently more complex as this article from page 2 of June 2nds Wall Street Journal shows:

OPEC Maintains Output Targets but Trims Supply

Caracas - With oil prices still above $70 a barrel, the Organization of Petroleum Exporting Countries left its oil-output targets unchanged as expected. But behind the scenes, some major exporters already have begun making moves to effectively trim oil supply, said delegates attending the meeting.

The cartel didn't take up the hawkish call by Venezuelan President Hugo Chavez to formally cut output, set a price ceiling of "infinity" or shift the pricing of petroleum to euros instead of dollars. Qatari oil minister Abdullah bin Hamad Al-Attiyah said yesterday OPEC ministers had decided to leave output unchanged.

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But some analysts estimate that oil supply from OPEC nations is already well below the formal output quota of 28 million barrels a day, exluding Iraq, and is running as much as one million barrelsa day less than a year ago.

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The Saudis are producing less oil, say cartel officials. Saudi and Iranian producers, through a pricing mechanism that either encourages or discourages buyers, also have taken steps to reduce the amount of oil that reaches the market, the officals said.

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The reason for the cutbacks: While oil use is rising, global inventories are flush. This is causing concern in OPEC that if investors cut back on heavy purchases of oil futures, prices could fall precipitously. Underscoring those concerns, Saudi Oil Minister Ali Naimi said yesterday the oil market is both oversupplied and overpriced, adding that the OPEC heavyweight is seeing no extra dmeand from its customers for oil, especially the heavy crude that's more difficult to refine into fuels like gasoline.

Oil ministers are saying oil prices are being driven up by financial investors, not by fundamentals of supply and demand. "Oil could drop to $40 per barrel" if hedge and pension funds decide the price has peaked and redirect money into other markets, said one senior delegate from a major Middle Eastern country.

Such worries may seem misplaced at a time when the world economy is using up more oil. OPEC's leaders reply that they have seen oil markets turn quickly in the past. In the late 1990s, prices plunged below $11 a barrel as Asian economies tanked when inventories were high. While markets can turn on a dime, curtailing production and reducing inventory can take months.

As a result, key OPEC members are adjusting their prodution and deliveries downward to preclude further, price-threatening increases in consumer stockpiles of oil, thus preparing for the day when markets turn against them. But they are doing so quietly, because of consumer anger over high prices at the pump. As a whole, OPEC's output has fallen by about 600,000 compared with less than a year ago, at about 27.3 million barrels a day excluding Iraq, according to PFC Energy, a Washington oil-consulting company. That doesn't include oil pumped but put in storage instead of sold. Saudi Arabia, Iran, Venezuela, and Nigeria are all producing less oil than they did a year ago.

"They're starting to draw down hefty crude stocks" world-wide, said Roger Diwan, a PFC analyst, on the sidelines of the OPEC meeting. "This will position them better for any downturn in price or demand."

Some of the decline, say OPEC officials, results from an attempt by Saudi Arabia and Iran to keep world oil supplies in check. They are dong this by opting not to discount heavy, high-sulfur grades of crude oil.

OPEC had seemed to be in something of a pickle. Oil inventories are growing quite large and a sudden price collapse is possible. But the obvious solution of a cutback in production quotas would be a public relations disaster with oil selling at $70 per barrel. The solution? Leave quotas officially the same to assuage consumers but in reality cut back on your production. A very elegant solution by OPEC which has been completely missed by most people who are just focusing on the news about the quotas not being changed.

So while the opposition is gleefully asserting that the summit was a failure for Chavez in reality he has been getting precisely what he wanted - a price supporting production cutback. Once again we see that Chavez and OPEC are quite shrewd while the dunces that make up the opposition just don't get it. They are fixated on bombast and rhetoric while missing what is really going on behind the scenes.
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