OPEC holds its breath

25 January 2002

The oil price was in limbo in mid January after its slow retreat from a three-month Brent high of $20.15 a barrel achieved in late December. The lack of price movement was the result of the market waiting to see whether recent pledges to cut output would be fully enforced.

A production cut of 2 million barrels a day (b/d), being carried out by both OPEC and non-OPEC producers, was due to start on 1 January and affect the US and Europe in early February. Due to the lateness of the decision to cut, there is likely to be a slight delay in turning off the taps.

OPEC refused to cut output alone for fear of losing more market share to the increasingly productive non-OPEC countries. However, the non-OPEC cuts were taken from forecast January high output levels rather than from December production. Russia, and now the US, are set to overtake Saudi Arabia's production of 7.5 million b/d if OPEC quotas stay unchanged this year. The unseasonably warm winter weather has also continued to dampen demand in the US, which was already depressed by the poor economic climate.

But, market fundamentals look set to strengthen. Washington's decision to increase its strategic petroleum reserve by 41.5 million barrels is expected to pull some 170,000 b/d from the market for the duration of 2002. By mid February, the OPEC and non-OPEC cuts should have taken effect. The International Energy Agency in January forecast 2002 global oil demand would rise by 600,000 b/d as opposed to the meagre 100,000-b/d rise in 2001. OPEC is making more cheerful noises too. 'For now there is no increase in production expected,' said secretary general Ali Rodriguez about the organisation's March meeting. 'If there is a recovery in the world economy, there could be an increase based on growth in demand.'

The price of benchmark Brent crude on 23 January was $18.80 a barrel, a slight increase over the previous week.

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