OPEC Delegate Hints at Output Rise to Limit Prices

December 31, 2002
By NEELA BANERJEE

In an effort to restrain oil prices, which have reached
their highest levels in two years, the Organization of the
Petroleum Exporting Countries is considering increasing
production by 500,000 barrels a day in the next two weeks
or so, a senior OPEC delegate said yesterday.

Reports of the potential move helped lead to a 4.1 percent
decline in the commodity price of crude oil. In New York,
oil for February delivery fell $1.35 yesterday, to $31.37 a
barrel. Earlier in the day, the price soared to $33.65, the
highest point in two years. Prices for gasoline and heating
oil fell as well.

But traders cautioned that the decrease might not be part
of a trend. The OPEC members that have the spare capacity
to produce additional crude oil are in the Persian Gulf
region, and it generally takes 40 to 50 days for oil from
there to arrive in the United States. That may be too long
a wait to compensate for the cutbacks in oil that have been
caused by a general strike in Venezuela, and prices may
soon rebound, industry analysts and traders warned.

"People started to take profits when the OPEC news came
out," said Philip J. Flynn, senior market analyst for
Alaron, a Chicago futures-trading firm. "The market was
ready to move down anyway. People were looking for an
excuse to sell off. Nothing fundamentally has changed, even
if OPEC raises production, because it will take five or six
weeks for the oil to get here."

OPEC has a system called the price-band mechanism that
calls on members to confer and explore changing production
limits if prices for a group of different crude oils fall
below $22 a barrel or rise above $28 a barrel for 20
consecutive trading days. The organization was quick to
reduce production by 500,000 barrels a day when prices
lagged, though it has been reluctant in the past to
increase production by similar quantities when prices rose.


But oil prices have been above $28 a barrel for about two
weeks now, and OPEC members are nervous that the high
prices will curtail global demand. There is usually a lag
of a few weeks between a rise in crude oil prices and a
commensurate increase in the retail prices of fuels like
gasoline and heating oil. And those prices, too, jumped
sharply last week.

"OPEC is watching prices closely," said the senior
delegate, who spoke on the condition of anonymity. "They
don't like it to go above $28. OPEC has a commitment not to
allow a shortage to take place."

OPEC now pumps 23 million barrels a day, though industry
analysts contend that members produce above their official
quotas to take advantage of high prices. OPEC members are
supposed to reduce their overproduction tomorrow, but "no
one has really cut, given the situation in Venezuela," said
Gary N. Ross, chief executive of the PIRA Energy Group, a
New York consulting firm.

The four-week strike in Venezuela against the government of
President Hugo Chávez has virtually brought the oil
industry there to a standstill and reduced exports to a
trickle. Venezuela is the fourth-largest exporter of oil to
the United States, accounting for about 14 percent of this
country's imports.

Venezuelan officials said they had taken steps to revive
production, but oil traders said they remained skeptical.

The OPEC disclosure may not salve the overheated oil market
in the near term, but the member nations' oil will be
needed if the standoff in Venezuela between opponents and
supporters of Mr. Chávez drags on, as it appears likely to
do, Mr. Ross said. "They're trying to jawbone a bit to get
the price down now," he said, adding, "Even 45 days from
now the market may still need the oil, with the Venezuelan
situation and what might come with Iraq."

Besides the long wait for oil from the Persian Gulf,
replacing Venezuelan oil may be complicated by the kind of
oil that is now available. Some types of Venezuelan crude
oil are very "heavy," or viscous, and such oil, the OPEC
delegate said, might not be readily available in the
quantities that United States refiners need. Several
refineries in the United States and two large ones in the
Caribbean that supply this country have sharply reduced
their output because of the shortage of Venezuelan crude
oil.

Mr. Ross pointed out, however, that those refineries could
use a different grade of crude oil, though they would not
run as efficiently. And they may be able to increase output
again, he added.

The American Petroleum Institute is expected to release its
weekly oil storage data today, which would give the markets
a clearer sense of the effect of the Venezuelan situation.
Traders said they expected stocks of crude oil and
petroleum products to be considerably lower than the week
before. Mr. Ross estimated that refiners had about 20 days'
worth of supplies at the current pace of oil processing.

"When the A.P.I. data come out this week," Mr. Flynn said,
"I think the market will get a nice big slap in the face."

Natural Gas Prices Fall
By Bloomberg News

Natural gas
futures tumbled yesterday to the lowest level in more than
two weeks on expectations that warmer weather early next
month in much of the central and eastern United States
would curb demand.

Temperatures in the Midwest and Northeast are expected to
be above normal from Saturday through Jan. 8, according to
the National Weather Service's latest 6-to-10 day forecast.
Higher temperatures signal reduced heating use and will
probably extend a recent decline in gas futures, traders
said. Prices fell 3.8 percent last week.

In New York, gas for February delivery fell 22.2 cents
yesterday, or 4.4 percent, to $4.80 a million British
thermal units, the lowest close since Dec. 11. Prices were
still up 14 percent this month and 87 percent this year.

http://www.nytimes.com/2002/12/31/business/31OIL.html?ex=1042379443&ei=1&en=c56c3573754e1a0f