October 28, 2003	Tuesday	Ramazan 1, 1424

RIYADH, Oct 27: The Opec is striving to keep oil prices above $25 a barrel, significantly higher than official floor of the $22-28 a barrel price band, energy analysts strongly feel in Dhahran, the virtual global energy capital. The Opec’s pre- emptive output cut, within three days of prices falling below the $25 level, provides a clear indication that the Opec is now defending the price level of $25/per barrel. The 0.9 million-bpd output cut is to take effect from November 1.

Over the last twelve months, a combination of higher oil prices and higher oil production has boosted Opec’s revenues by $60,000 million. In the case of Saudi Arabia, which has used its spare capacity of roughly 3 million barrels a day, to meet the global demand during the Iraq crisis, an extra $19 billion has been earned the last year, the prestigious Centre for Global Energy Studies (CGES) founded by the former oil minister Sheikh Zaki Ahmad Yemeni said in its current issue of Monthly Oil report. Having budgeted for a $10 billion deficit during the current financial year to end December 31 this year, this could mean an $8-10 billion surplus budget.

The argument that Opec is now striving for a $25 a barrel floor, as a fair price for both producers and consumers was further augmented by the fact that not many analysts then felt that given the circumstances during the ministerial meeting, the Opec would go for a production cut. However, the Opec’s decision thus stunned the analysts.

This is further strengthened by the fact that some Opec members such as President Hugo Chavez has been openly calling for Opec to raise its price band to $25-32/per barrel in order to compensate for inflation and the weakening dollar. There is definitely strength in this argument.

Some others however, disagree with the line taken by Hugo Chavez. International Energy Agency Executive Director Claude Mandil says that oil prices are now too high and could undermine the economic recovery. Norway and Russia, the two non-Opec producers maintain that oil prices above $25/per barrel hurt the consumers.

The CGES Monthly Report argues that Opec needs to accept a lower price for its oil or face a steady decline in its market share for the rest of the decade.

There are also indications that bringing the Opec output to the envisaged level of 24.5 million bpd may not be easy to achieve. Some members, Venezuela and Indonesia, are already producing less than their new quotas and are hardly likely to cut, while others such as Algeria, Libya, Nigeria and Qatar are reluctant to cut as they have expanded recently the upstream capacity and are desirous of increasing their share of Opec’s output.

It seems that Opec may hold the prices at around $25/per barrel level until at least the end of the year. There is no lack of demand for crude this quarter. Asian refiners have stepped up purchases as throughput start to rise ahead of peak winter deliveries.

Eastbound lifting from the Middle East have been rising for the last four months and now are at their highest level for a year. Cargoes are also moving to Asia from as far as Russia and the Caspian, Norway, Algeria and South America. Chinese refiners also continue to buy heavily to meet the strong demand. The country’s crude runs in July and August climbed to a record 4.9 million barrels a day, 18 per cent up on the previous year.

Thereafter the course of oil prices would depend on the severity of the winter, the pace of restoration of Iraq’s oil exports and Opec’s response to these factors. The CGES reports that in order to achieve its price target of $25/per barrel and in wake of the envisaged rise in the Iraqi and non-Opec crude production, the Opec may be required to reduce the output early next year. At that stage Saudi Arabia, the kingpin of the Opec, would require the whole-hearted support of others, and that may not be easy to achieve, comments the CGES.