Oil Economics Weekly

OPEC will begin meetings Monday with non-OPEC members. They are already arriving in Vienna for what will be one of the more interesting meetings. Non-OPEC members will certainly have some say in the proceedings. The new Oil Minister for Kuwait Sheikh Saud Nasser al-Sabah gave some indication that further cuts were possible.

During the past week suspicions that a production cut isn't always a production cut have been confirmed. Indonesia and Iran have indicated that their cuts are pure vapor. Indonesia and Iran have announced cuts of 70 and 140 thousand barrels per day respectively. However, they have also indicated that the cuts are to be from their quotas not from actual production. That means no cut at all as their current production is well below their OPEC quotas. Taking this into consideration the announced cuts for OPEC of over 1.2 million barrels per day are closer to one million barrels.

Norway's parliament has finally approved a reduction but will delay coming up with a number until later this week. Russia has indicated that it will not cut production but there is some uncertainty in those statements. Many analysts believe that a contribution from Russia is still possible.

As it stands today oil prices measured by North Sea Brent are up $2.00 since the announcement and up about $3.50 from the low earlier this month. It is clear that the current price of $15.50 is well below the goal set by many exporting countries and there will be an effort to move that number up to at least $17.00.

If we assume that Norway will actually come up with a 100 thousand barrel per day reduction and that nobody cheats a total of 1.3 million barrels will be taken off the market. That may be enough to keep prices between $14 and $15 per barrel. OPEC and its non-OPEC partners need to come up with half again that much to reach a $17 price. If that is to happen everyone will have to come up with greater cuts.

Saudi Arabia is the best candidate for more reductions but they are unlikely to do so without help. If Saudi Arabia cut another 300 thousand barrels and could obtain commitments for another 400 thousand barrels from the other players the price would go into the $17 range.

To get an idea of the impact look at the following scenario. Assume a price before additional cuts of $15 and that Saudi Arabia is producing about 8.4 million barrels per day after the first round of cuts. Current revenues would be $126 million dollars per day. If they cut an additional 300 thousand barrels to 8.1 million barrels per day and the price rise was $2 to $17 per barrel then total Saudi revenue would increase to $137.7 million per day. That still requires an additional reduction of 400 thousand barrels per day by others.

The Saudis could assume the entire burden but don't expect it to happen. Saudi Arabia played the role of swing producer in the 1980s and their memories are not short enough to repeat that mistake.

Who are the best candidates for additional cuts? There will certainly be pressure on Iran and Indonesia to make some real cuts. Venezuela and Qatar are still way over quota so those countries are real candidates. We could probably look to the remaining contributors to the first round for some additional help.

It will be another interesting week.

Here is a score card to help you keep track of the changes during the coming week: