Output unchanged as Silva takes charge

28 June 2002

OPEC stuck to the script at its 26 June meeting, agreeing to roll over production quotas for the second successive quarter and approving the appointment as secretary-general of Venezuelan Energy & Mines Minister Alvaro Silva, who will replace fellow countryman Ali Rodriguez. The stress on stability reflects both OPEC's satisfaction with current oil prices, which have stayed within their target band of $22-$28 a barrel since early March and a contradictory fear that those prices are not supported by strong market fundamentals. Quota compliance has been poor of late, and the meeting addressed ways to improve output discipline.

Official OPEC production will now stay at the level of 21.7 million barrels a day (b/d) that was implemented at the start of January and rolled over at its last meeting in March. The organisation's next meeting is scheduled for 18 September. OPEC's decision was influenced by poor global oil demand and the discontinuation of output restrictions by Norway and Russia, agreed with OPEC in December as part of a 500,000-b/d non-OPEC production cut.

Analysts say that if production remains unchanged throughout the third quarter, there is a possibility of price spikes before the onset of the northern hemisphere winter, when demand is traditionally 1 million b/d higher. 'It would seem that OPEC has delayed the real decision on output until September. If prices are high, I expect it to increase production by about 1 million b/d. Otherwise it will probably just roll over the level again,' says Muhammad Ali Zainy, senior energy economist and analyst at the London-based Centre for Global Energy Studies (CGES). 'If demand increases and OPEC does not increase production, Brent could hit about $29 a barrel.'

Oil demand has been poor for the past year, and any improvement will be tied to economic recovery in the US. Energy Information Administration figures released on 26 June indicated that US demand remained weak in mid June, with an increase in gasoline stocks by 1.2 million barrels in the week ending 21 June.

Despite the poor climate, OPEC is producing an estimated 1.4 million-1.5 million b/d above its quota, according to CGES, as members strive to diminish the pain felt at lower oil exports over the past year. 'We will be asking people to comply better,' said OPEC President Rilwanu Lukman in the run-up to the meeting. Venezuela, a production hawk in recent years, is reported to have sharply relaxed its own discipline since the foiled coup against President Hugo Chavez in April.

The Caracas imbroglio was partly sparked by discord over energy policy, another result of which has been Chavez's appointment of Rodriguez as president of state oil company Petroleos de Venezuela. Silva, who replaces Rodriguez as secretary-general, was involved in founding OPEC and has been described as a production hawk. His tenure will only last 18 months, the length of time Rodriguez had left in office.

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