November 05, 2006	Sunday	Shawwal 12, 1427

RIYADH, Nov 4: Fundamentals are in firm control of the crude markets, earlier than some had anticipated. Supplies are abundant, the global industrial machinery appears well oiled and the extra-market forces are no more in saddle. The overbearing fear factor also appears to have evaporated.

Inventory levels, real output, the demand-supply balance hence are driving today the market sentiments, bringing the prices down. How orderly is the Opec -- markets continue to test and tease.

Reports of threat earlier the week to Saudi oil infrastructure helped nudge up the crude markets by a dollar or two, but as soon as the threat apparently subsided, crude lost the gains, returning back to below $60 mark and approaching the mid-50s level. With a capacity of six million barrels a day, any threat to Ras Tanura oil terminal could not have been taken lightly for it handles roughly two-third of Saudi oil exports. Any disruption here, even if small, could have hit the raw sentiments of the crude market. This is serious business and could not be left to chances.

The Saudis were prepared to handle any eventuality within their territory. They had done so earlier too when in February an attempt was made by extremists to blow up the Abqaiq refinery. That attempt was thwarted.

Since the threat last week was believed to be seaborne this time, the coalition maritime forces present in and around the region were also geared up to take care of the international waters. The scare helped firm up, for a few days, the otherwise falling markets.

In the meantime, leading Opec players were already up showing their grit, determination and resolve in safeguarding their interests. Saudi Arabi--the King pin--had already told its customers during the Eid holidays of cut in its shipments to major customers in the US and Asia. Others were also not far behind.

Analysts were anticipating somewhat reluctance from Iran in this case as it along with some other Opec members was already producing beneath its allocated quota due to infrastructure related problems. Iran’s Opec quota is 4.11 million bpd but its actual output in September, according to an OPEC report, was 3.875 million bpd.

Iran along with some other hawks, including Venezuela have been arguing and pleading for a quota-based cut in output. That would have left Iran’s output at the current levels. While others, including Saudi Arabia, argued an output cut based on current output to have any real sense. Every member had to bear the burden, they pleaded. Ultimately saner elements prevailed and it was decided — behind closed doors in Doha — to go for cut in output based on current production.

If the scheme had to succeed every one was required to contribute to the cut in output. The cuts once fully implemented would reduce Opec's actual production to 26.3 million bpd from 27.5 million bpd--below the official Opec quota of 28 million bpd, in place since July 2005.

Due to apparent argument and counter arguments, behind closed doors in Doha on the issue, there still exist doubts in the market that the oil cartel may falter in implementing the output cut. Eyes hence remain glued to Opec’s moves.

However, despite some trembles, some seriousness could be seen within Opec. After Saudi Arabia, Iran also made the announcement it would cut its output as was required under the Doha deal. Iran's oil exports were hence to drop by 176,000 bpd as Opec's second largest producer implements its share of a deal to cut output, Iran's oil minister announced.

"This amount will be from the actual production of the country and considering the fact that domestic consumption is fixed, Iran's oil exports will decrease by this amount," Oil Minister Kazem Vaziri-Hamaneh clarified in a press statement.

Libya and Kuwait also announced joining other members in the proposed output cut.

Kuwait announced cutting its oil output by 100,000 bpd from November 1, while Libya also vowed to implement a supply cut of 72,000 bpd from its normal production. Opec seems serious this time. Despite its pledge to cut its output by 100,000 bpd, doubts persist about Nigeria. Oil majors active in Nigeria may not be willing to implement the output cut some believe. There could be other reasons too why the Nigerians may not be able to fulfil their contractual obligations.

The Niger Delta is faced with a number of problems. Oil production activities were disrupted last week at Anglo-Dutch giant Shell's facilities and American oil giant, Chevron-Texaco facilities in parts of Nigeria.

Youths of Kula in the Akuku Toru council area of the state, who disrupted production, were demanding better facilities to the people of the region where the oil facilities are located.

Angry youths also occupied a gas plant owned by Italian oil giant, Agip, in the Ogba region of Rivers State, in the Niger Delta.

After agreements, plants were reported to be back in operation, later this week. Hence there are question marks if the oil major operating these plants would be a willing partner to the output cut, unless forced by the government.

Markets are keeping a close eye on all these developments. Proof of pudding lies in tasting. Once Opec proves beyond doubt it has the guts and the resolve to stand by its commitments, its writ would be established and then things could change and perhaps dramatically.

But in order to be there, a lot distance still is to be covered. The onus currently is on Opec and its leaders, one has to emphasise. Markets are testing their resolve.

And in order to achieve its objective of what could be termed as ‘fair return’ some more belt-tightening could also be required. Analysts feel the oil cartel may have to mop up some more crude from the market when it meets again in Abuja in December--if not before.