Market awaits Russian decision

22 February 2002

Questions over Russian production, potential military action in Iraq and US stocks growth preoccupied the market in mid February. The combination brought about a modest decline in the oil price by about $0.60 over the week to $20.18 a barrel of benchmark Brent crude on 20 February.

Russia is now considering whether to restrain its oil output into the second quarter to support the oil price. It cut production by 150,000 barrels a day (b/d) in January as part of a deal between OPEC and non-OPEC producers to reduce world oil supply by 2 million b/d. Russian deputy prime minister Viktor Khristenko said on 19 February that market stability would be the basis for its decision. He said the cuts undertaken in January had had a positive effect on the oil market.

OPEC president Ali Rodriguez said on the same day he hoped there would be no change. 'I can't state anything on behalf of Russia but I believe we can discuss this problem because effectively the second quarter will be worse than the first quarter,' he said. The onset of spring in the northern hemisphere historically hurts prices as fuel demand eases. UAE Petroleum & Mineral Resources Minister Obeid bin Saif al-Nasiri took a similar position. 'Without co-operation from Russia and other countries, OPEC would not be able to preserve suitable levels for oil prices,' he said on 18 February.

OPEC's own supply quotas are not set in stone. 'Any measure could happen in the search for stability,' said Venezuelan Oil Minister Alvaro Silva on 15 February. The next OPEC meeting is scheduled for 15 March, and some members maintain they want output levels to remain unchanged. 'We have an agreement for six months which will stay in effect without change if there are no developments that require that,' said Al-Nasiri on 18 February, echoing recent hints by Saudi Petroleum & Mineral Resources Minister Ali Naimi that output could stay unchanged throughout 2002.

But political volatility could throw a spanner into OPEC's plans. Talk of US military action against Iraq has re-emerged of late, leading to fears that Iraqi oil could be cut from the market altogether. Iraq produces nearly 3 million b/d. Concern is also high that embattled Venezuelan President Hugo Chavez will be forced from office in 2002. Chavez has reversed the country's lax production quota discipline and has been one of the firmest advocates of OPEC's preferred price band of $22-28 a barrel.

Oil demand is 5 per cent lower than in February 2001 and is not expected to pick up until late this year. US crude oil stocks rose by some 2.5 million barrels in the week ending 15 February, as warm weather and the slow economy kept demand weak. The figures mean that reserves have risen for seven weeks running.

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