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The Organization of Petroleum Exporting Countries (Opec) has agreed to increase its oil output quota by 1.5 million barrels par day to 24.5 million bpd from February to try to curb a price surge triggered by a slump in Venezuelan exports. A strike in Venezuela has raised concerns about supply, as the country exported over 2.0 million bpd.
The increase in oil supplies from Opec is to ensure adequate supplies of crude to consumers and restore balanced market conditions. Also the move was in response to the recent rise in oil prices, which have shot up to $30 a barrel or more, well above the upper end of the group’s target price band of $22 to $28.
The 11-nation grouping, which produces around one third of the world’s crude oil, agreed to raise output to calm markets roiled by the prospect of a war in Iraq and by a strike in Venezuela that has crippled oil exports. Iraq is not included in the grouping’s output quotas.
The US oil recently rose above $33 a barrel for the first time in two years. On January 10, the price of benchmark Brent North Sea crude oil for February delivery stood at $29.88 a barrel, against $30.22 a week earlier.
In New York, February-dated light sweet crude futures traded at $31.99, down from $32.57 a week earlier. Oil prices were hit as speculation mounted that the members of the Organization of Petroleum Exporting Countries were set to sanction an increase in their combined output quota of between one and two million barrels per day at a meeting in Vienna on January 12.
Even if the strike in Venezuela’s were to end now, industry sources reckon it might take four months for production in Venezuela’s oil fields to return to its former level of 2.9 million bpd. At present, Venezuela’s oil output is running at only 600,000 bpd.
The US Energy Information Administration (EIA) estimated that the effects of the Venezuelan strike had so far removed some 50 million barrels of oil from world inventories and that a prolonged strike, without offset from the increased production elsewhere, would lead to further depletion at the rate of 70 million barrels per month. An actual increase of other Opec countries’ output of 2.0 million bpd would offset some 60 million bpd of this depletion rate.
The tight inventory situation is likely to put a floor under the oil price towards the top end of Opec’s $22-28 per barrel preferred range. In this respect, the current situation differs from the position in September 2001 when the spike in oil prices reflected hoarding in view of a perceived heightening of political risks.
In recent weeks gold prices have risen to six-year highs as a US build-up for possible war in Iraq sent investors piling into safe havens and bore down on the dollar. Gold prices had risen to $356.10 per ounce in the early part of the second week of the month on the London Bullion Market, the highest fixing since March 1997. Jitters over tension between the United States and North Korea and fears of further terror attacks have underpinned the metal, which has become one of the strongest performing financial assets.
The scale and role of the US and allied military build-up against Iraq would also be key to gold and oil price direction, analysts said. While the risk-reward profile of holding gold in place of other assets remains as favourable as it currently is, the broad gold price uptrend is likely to remain in place, said Merlin Marr-Johnson, analyst at the HSBC Bank USA, in London.
The higher gold prices have given gold mining companies a new lease on life, with a chance for more capital investments. Some companies say the rise is not over. The Goldcorp Inc, a mid-tier Canadian producer, which has accumulated over 180,000 ounces in gold bars, said the gold price is still not high enough to warrant selling its bullion.
The platinum group metals price also rose, boosted by the supply concerns. By January 10, an ounce of platinum had firmed to $618 on the London Platinum and Palladium Market from $603 the previous week. There was not enough supply to match the demand. Palladium rose to $267 per ounce from $236.
Base metals prices rose in response to the glimmers of hope seen in the US economic data and strong demand for market leader copper. Nickel was also ahead of the pack, thanks to investment fund buying, trade short-covering and some panic buying by the consumers, traders said. After several difficult years, analysts say base metals should continue their recent stop-start rebound through 2003, though a strong bounce back will require a recovery in the global economy which is by no means a foregone conclusion. On the London Metal Exchange (LME), three-month copper prices rose to $1, 642 per tonne on January 10 from $1, 607 the week before.
