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Oil prices dip despite pact
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March 23, 1999: 10:23 a.m. ET
Price impact of OPEC accord unlikely to be felt before summer, say analysts
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LONDON (CNNfn) - A long-awaited pact Tuesday by the world's leading oil producers to end a global oil glut by sharply curtailing supplies had little immediate effect on oil prices in London. Most analysts said the market had already had ample time to digest news of the watershed agreement.
Benchmark North Brent crude for May delivery was down 18 cents in London at $13.70 a barrel shortly after OPEC ministers meeting in Vienna signaled that they had approved an accord to remove 1.7 million barrels a day from the market.
The new curbs will take effect April 1 and remain in force a year. They come on top of further agreed cutbacks from non-OPEC producers that will raise the total reductions to as much as 2.1 million barrels a day, or about 2.8 percent of global supply.
Brent prices have surged about 30 percent this month. The spike has come amid expectations that an agreement hammered out by the leading oil producers at an informal gathering at the Hague on March 12 would prove more successful than two previous reduction pacts last year.
Those pacts stumbled on compliance problems by Venezuela and Iran, which other producers allege failed to adhere to quotas. Under the slimmed-down export regime unveiled Tuesday, Saudi Arabia will shoulder one-third of the cuts, drawing down production by 585,000 barrels a day.
The oil producers coalesced around the deal in the face of economic necessity, after oil prices plummeted below $10 a barrel as global stockpiles swelled amid weakened demand from Asia and inadequate quota controls.
By one estimate, Reuters reported, the nose-dive has cost OPEC $50 billion in lost revenues from oil exports. OPEC accounts for 40 percent of global oil output. Under Tuesday's pact, OPEC's daily output would fall to 22.976 million barrels a day from 24.692 million a year ago.
So far in 1999 this year, Brent has averaged $11.22 a barrel - its lowest level in more than two decades - compared with $13.34 last year.
OPEC producers said they are aiming to restore oil prices to about the $18 level that prevailed just before the onset of crisis. But analysts say produces may have to accept a more modest increase in the short term.
"People would be very satisfied if we exited 1999 with prices in the $14 to $16 range," said Charlie Sharp, an oil analyst with T. Hoare & Co. in London.
Sharp and others say that inventories are so bloated at present that prices are unlikely to react in any dramatic way to Tuesday's pact until this summer. Sharp said he did not expect a "fundamental balancing" for at least six months.
Peter Gignoux, the manager of the Petroleum desk at Salomon Smith Barney said the success of the pact would ultimately ride on OPEC's ability to conform to its quotas adequately enough to boost prices to the target level and keep them from falling back.
Mexico, Norway, Oman and Russia - all non-OPEC members - have agreed to contribute to OPEC's pact with further cutbacks that will bring the total reductions to 2.1 million barrels daily.
Analysts said the slight dip in oil prices Tuesday was hardly surprising. After the initial excitement generated by the Hague agreement, they said, most traders were now looking ahead to how the pact would play out in reality, especially in light of the failure of past efforts to deliver on their promises.
"In the run-up things were looking quite promising and solid, and now it really is a matter of, can they comply and of looking at the (oil) companies and seeing which are able to withstand relatively low oil prices," Sharp said.
--from staff and wire reports
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