Oil Economics Weekly

More commitments to export reduction have been reported. The revised table below reflects the recent additions along with expected cuts (shown in italics) for Norway, Russia and Malaysia. Reports that Indonesia and Nigeria will cut a total of 195,000 barrels per day are not reflected in the table. If theses numbers hold add another buck or so to the price increase. Expect price increases of $3-4.00 over last Friday if Indonesia and Nigeria actually come aboard with Norway and Russia at the reported numbers.

A further caution: Iran's commitment may be vapor rather than oil. Iran is already significantly below quota because of production limitations and they may want to make their cut from barrels they are not producing.

There are a couple of sayings that are common among economists and those who introduce them at "free lunches":

1. Never mention a price and a date in the same talk.
   
2. If you can't forecast well, forecast often.

OPEC acted quickly and received help from outside the cartel. But remember, it won't last forever! There was an announcement Sunday following rumors on Friday that OPEC has reached an agreement with non-OPEC (NOPEC) countries to reduce crude production by 1.6 to two million barrels per day. The announcement was made after two days of secret talks in Riyadh. The statement said that they had already received commitments for a 1.1 million barrel per day reduction. The main players in putting this deal together are Saudi Arabia, Venezuela and Mexico. The plan is expected to stay in effect through the end of the year.

At this point there is no word from Indonesia, Libya or Nigeria although OPEC sources claim that all OPEC members except Iraq have agreed to participate. A week or so ago Indonesia was very anxious for an OPEC meeting to control production, but given its economic and political climate any contribution from that country will be minimal.

Non OPEC contributions include Mexico at 140 and Oman at 40 thousand barrels per day. Norwegian sources have "not ruled out a reduction".

So far we have been able to verify 955 thousand barrels per day. This means that the commitments of 1.1 million barrels is probably a firm number. Firm is defined here to mean "firm commitments". It does not mean that all of those commitments will be kept for the year of the agreement. Despite the surprising news we are still dealing with OPEC.

Export Reduction Commitments

	Quota	December Production*	Export  Reduction
Algeria	909	860	50
Indonesia	1456	1360	?
Iran	3942	3600	140
Iraq	1314	776	None
Kuwait	2190	2175	125
Libya	1522	1450	?
Nigeria	2042	2220	?
Qatar	414	670	?
Saudi Arabia	8761	8725	300
United Arab Emirates	2366	2230	?
Venezuela	2583	3450	200
OPEC	27499	27516	815
Mexico			100
Oman			40
Non-OPEC			140
Total Commitments			955
* DOE/Energy Information Administration

Where is the other 400,000 to 900,000 barrels discussed in the announcement? A reduction of 1.1 million barrels per day is a long way from 1.6 - 2 million barrels per day. Except for Norway there aren't many candidates to come up with the additional uncommitted barrels. It could be that Saudi Arabia has made a backroom deal to cut its production more than 300,000 based upon the behavior of the other players. Other than that it seems like wishful thinking.

What will be the reaction of traders? Although this week will see a trading frenzy when the dust settles the increase will likely be in the one to two dollar range. The big gasoline demand season coming up in the U.S. should help and if Asia comes out of its slump the picture by year end could be much better. But right now the fundamentals tell us that the market will still be somewhat oversupplied even with a 1.1 million barrel drop in exports. Almost all the new reports mention a 2.7% reduction in world production. That percentage is with a two million barrel per day reduction, so far we have seen only half that amount.

If significant news comes out this week indicating much larger reductions we will update this report mid-week.

Other news: Kuwait has a new oil minister Sheikh Saud Nasser al-Sabah. He's the same guy that was at the center of the controversy for allegedly allowing the display of non-Islamic books. This means he will be the top person in Kuwait Petroleum. Corp and will have a seat on the Supreme Petroleum Council. It sounds like a promotion from his job as information minister. The change will probably not impact Kuwait's OPEC policy in any significant way and it removes him from the religious issue.

James L. Williams
WTRG Economics http://www.wtrg.com