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OPEC spurs oil sector leap
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March 11, 1999: 9:41 a.m. ET
Oil ministers mull cutbacks as stocks surge; experts warn recovery will be slow
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LONDON (CNNfn) - Oil prices pulled back from Wednesday's four-month peak Thursday but remained buoyant as ministers from the world's leading oil cartel and Mexico mulled a proposal to slash as much as 2.3 million barrels per day from worldwide oil supplies.
Benchmark April Brent crude shed nine cents to $12.37 in London - 30 cents off Wednesday's high - amid anxiety over the outcome of a meeting near Amsterdam between OPEC powers Saudi Arabia, Venezuela, Algeria, Iran and non-OPEC Mexico.
On the New York Mercantile Exchange, April light crude eased 13 cents to $14.56.
Nonetheless, oil companies in Europe surged on the news that producers may be on the verge of a major breakthrough. In London, BP Amoco (BPA) rocketed more than 8 percent to 1,005 pence, while Shell (SHEL) charged ahead 6 percent to 386 pence.
French oil giants Elf Aquitaine (PAQ) and Total (PF) both leapt 6 percent.
The conclave comes a day after Gulf oil ministers vowed in a joint statement to "take all measures" to boost sagging oil prices by drawing down bloated worldwide oil supplies.
On March 23, OPEC is set to meet in Vienna, and a failure to come through with a concerted plan to curtail production could deliver a potentially devastating blow to historically depressed commodity prices.
Crude oil prices soared Wednesday as the market received word the producers were on the brink of an agreement that could help resuscitate stricken oil prices.
Those prices have slipped from around $20 a barrel in September 1997 to historic lows in recent months - even dipping below $10 a barrel at one point - as weakening demand, overcapacity, the Asian crisis and mild winters have combined with market-busting effect.
Venezuela the stumbling block
Any new round of cuts would come on top of about 2.6 million barrels in reductions pledged in two previous pacts between OPEC and Mexico. However, those reductions weren't enough to curtail oil supplies enough to lower prices.
Enforcing compliance will also be a key test of their resolve.
Until now, oil analysts say, Venezuela has remained a key stumbling block, even hiking production recently - in apparent breach of the accords - as a crucial election neared.
This time, however, OPEC may take a different stance.
"In order to get a deal done now, the Arab members of OPEC are maybe being more lenient with respect to Venezuela's ability to comply," said one London oil analyst who wished to remain unidentified.
Should the ministers reach consensus on the cuts, the analyst said, the market will greet the news in two phases: euphoria - which could spur buying in companies that specialize in exploration and production - followed by moderate disappointment as difficulties kick in.
No immediate results
According to Julian Lee of the Center for Global Energy Studies in London a pact in itself - even one that would knock 2 million barrels a day off global markets - may not deliver immediate results.
"Really, the difficulty is the whole situation has gone on for so long now," he said. "Supply is outstripping demand, and stocks of oil have built up to such a high level that almost whatever they do is going to take up to six months before it has a marked impact on prices."
Even assuming the cutback pledges are honored, Lee said, prices would only begin to recover modestly over the summer.
Any dramatic impact on prices would probably not become a reality until crude stockpiles had been drawn down far enough - a process that may stretch into the autumn or early winter.
Then , Lee added, as prices begin to recover from their slump, the danger will loom of a relapse among producer to the types of behavior that precipitated the downturn in the first place.
"The tendency (is) once prices start to rise, for everybody to open the tap a little bit," Lee said.
Little effect at the pump
Others pointed out that the increases will not necessarily translate into higher prices at the pump - at least not noticeably more expensive - since a large share of the pump price of gasoline is made up of government taxes, masking increases in crude prices.
Last year, global oil demand notched up by about half a million barrels a day - less than a third of what would be needed to affect prices, Lee said. This year, forecasts are for an additional million-barrel increase in demand.
"Industry will be praying for a busy driving season this summer, followed by a long, cold winter," Lee said.
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