Oil price goes Caracas

03 January 2003
The oil price reached two-year highs in the last week of the year as the Venezuelan crisis lurched on and more US troops arrived in the Gulf. Benchmark Brent crude was trading at more than $30 a barrel on 30 December, prompting speculation that OPEC would reverse its decision to cut actual production.

Venezuelan production between January and November averaged 2.7 million barrels a day (b/d). In December, production averaged just 600,000 b/d as 90 per cent of workers at state oil company Petroleos de Venezuela took industrial action in protest against the policies of President Hugo Chavez. Attempts by the government to break the strike, including threatened legal action and military attempts to take over production and export facilities, proved largely fruitless throughout the month.

And, despite claims by Energy & Mines Minister Rafael Ramirez that production would double to 1.2 million b/d in early January, there seems no sign that the crisis will end soon. Even if an agreement can be struck, analysts say production capacity will be impaired for several months as a result of the walkout.

Venezuela is having an even more bullish impact on the market than the Iraq crisis, which has been festering for most of 2002, keeping oil prices several dollars higher a barrel than is indicated by pure market fundamentals.

However, as talk of war in the Gulf continues, the oil market becomes more nervous and prices rise. Late-December reports that the US was sending more troops to the region contributed to the high prices and put pressure on OPEC, which earlier in the month agreed to cut actual production by around 1.3 million b/d.

OPEC must soon have to decide whether or not to implement its oil price mechanism, by which it adjusts production by some 500,000 b/d if the oil price stays outside its $22-28 a barrel target band for more than 20 consecutive days. In late 2001 it rejected use of the mechanism to push prices up because of the extraordinary conditions after 11 September.

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