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Markets & Stocks
OPEC: The heat is on
September 8, 2000: 6:45 p.m. ET

Vienna talks unlikely to curb prices amid fears oil headed for $40 a barrel
By Staff Writer Abid Ali
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LONDON (CNNfn) - Oil ministers gathering in the grandiose Austrian capital of Vienna this weekend face a crisis that could throw the world economy into a spin, with analysts warning the price of crude could go to $40 a barrel unless they take decisive action.

The United States, the world's biggest oil consumer, has called for OPEC to raise production to bring prices down to $25 a barrel, a goal backed by the world's biggest oil producer Saudi Arabia. Oil inventories are at a 24-year low and more heating oil is required to meet higher winter demand in the northern hemisphere.

American car drivers are paying an average $1.48 a gallon for unleaded gasoline, airlines are now passing on the higher fuel costs to passengers, and fishermen in France have blocked ports and rail links to Britain in a protest at rocketing fuel costs.

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Analysts expect Saudi Arabia to arrive at the cartel's ministerial meeting on September 10 with an offer to bump up production by 1 million barrels a day.

"The compromise could be 700,000 barrels but the actual production increase could be around 400,000," Peter Hitchens, an analyst at Williams de Broe, told CNNfn.com. "At 1 million extra barrels prices may be drawn lower but at 500,000 prices could hit $40."

Still, there are only three countries -- Saudi Arabia, Kuwait and the United Arab Emirates - that have the ability to increase oil output because the other countries are producing oil at capacity.

"There is no incentive for the other members to [agree to] raise oil production," Hitchens said. "They won't see any benefits because oil prices will fall."

'Price supported by speculation'


Hitchens said the "supply and demand price for oil stands at around $27, so $5 to $6 (of the current price) is pure speculation. There is no demand for oil at these prices, buyers are sitting and hoping oil prices will fall, but prices could shoot up if there is a panic. There is real concern heating oil could run out." 

There are two kinds of buyers for oil contracts. Investors, or speculators, buy and sell contracts betting on the direction of the market. The second group of buyers are refiners, shipping companies and airlines, which usually hedge the cost of fuel. The high cost of crude is usually passed on to consumers with higher gasoline prices at the pump, and the cost of everyday goods, such as fruits and vegetables may rise because of increased transport costs.

"There isn't a lack of crude in the market," Richard Savage, an analyst at SG Securities said. "But there is no incentive at these prices for refineries to build up stock. Refineries in the U.S. are operating at 97 percent and the situation is repeated in Europe."

"OPEC needs to increase production to improve sentiment in the market," Savage added.

OPEC, which is headquartered in Vienna, meets twice a year in March and September. The cartel held an extraordinary meeting in July because it was worried about the rising oil after which Saudi Arabia unilaterally raised production by 500,000 barrels but backtracked to maintain unity with its neighbors.

Brent crude rose to $40.95 on Oct. 10, 1990 during the Gulf War, and has been as low as $9.95 on Dec. 11, 1998. A year earlier, OPEC agreed to increase oil production to meet world demand, but Asia's economic crisis led to an oversupply of oil.

OPEC in early 1999 agreed to restrict production, tripling the price of crude over the following year.

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New agreement?


"Saudi Arabia and even the hawks, like Iraq, are reluctant to see the price stay above $30," Lawrence Eagles, head of commodity research at broker GNI Ltd., said in an interview. "They won't leave this meeting without a new agreement on the mechanism for delivery of more oil."

Under the latest mechanism agreed in July, if the cost of a barrel of crude moves outside the band of $22 to $28 for more than 20 consecutive days the cartel increases or contracts supply by 500,000 barrels a day. But because of capacity constraints OPEC can only pump an immediate 250,000 barrels extra. At that rate it would take about 60 days before OPEC members could deliver 1 million barrels a day, Eagles said.

"Whatever happens oil prices will remain high this winter," he concluded.

Kuwait's oil minister Sheikh Saud Nasser al-Sabah told Reuters Tuesday that his country will fully support an OPEC output rise of 500,000 barrels per day, but said he needs to be convinced of world crude shortage to back an additional increase.   

"We have made it very clear that we are in favor of stabilizing the market at a fair price," set by OPEC at between $22-$28 a barrel, the minister said. "We support any (OPEC) request for an increase because we have to implement the mechanism."

Unless prices drop dramatically an output rise will theoretically be triggered on Friday because that would be the 20th straight day the cost of crude traded outside the band, two days ahead of the OPEC meeting in Vienna.

Tussle over succession


The cartel is also split over the nomination for a new Secretary General, with Saudi Arabia, Iraq and Iran all backing their own representatives to succeed Nigeria's Rilwanu Lukman, who had his term extended after the cartel members failed to reach a consensus last September.

"Another compromise could be in the offing," Eagles said. "What we could see is (OPEC President and Venezuelan Oil Minister) Ali Rodriguez stepping down to take on the role."

OPEC is an organization of 11 oil producing and exporting countries: Algeria, Libya, Nigeria, Indonesia, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Together they produce about 40 percent of the world's oil. Oil produced by Iraqi, which operates under United Nations sanctions, is not included in the cartel's production agreement. Back to top

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