Oil Prices Falter, Opec Deal Fails To Impress

An Opec deal to freeze quotas has dodged the thorny issue of overproduction and papered over the cracks in the cartel's leaky quota system, oil traders said on Thursday.

The deal would do little to stem downward pressure on oil prices despite insistence by the Organisation of the Petroleum Exporting Countries (Opec) that quota-busting by its members had been addressed, they added.

The oil producers' group is pumping around two million barrels per day (bpd) above its self-imposed ceiling of 25.03 million bpd, which on Thursday it agreed to extend until the end of the year.

Opec secretary general Rilwanu Lukman said in Vienna at the end of the cartel's ministerial meeting that he was confident excess supply would be reined in but traders and analysts were unimpressed.

 

They were sceptical that cash strapped producers like Nigeria and Venezuela would be able to comply.

Oil prices slid steadily lower on Thursday after the deal was struck and many dealers saw the chance of further losses. Brent blend crude oil futures, the world benchmark grade, closed down 37 cents at $17.85 a barrel but were still well above a recent 12-month low of $17.32.

Opec's two heavyweights, Saudi Arabia and Iran, played quota police this week and extracted fresh vows of compliance from quota-busters.

But traders were doubtful that what they called the biggest quota cheater, Venezuela, would pump less oil and many expected softer prices in the short-term. (Reuter)

"Clearly the market won't get any support from Opec. The outlook remains bearish," said Scott Carter, senior oil trader at Tosco Petroleum in London.

Venezuela's oil minister Erwin Arrieta on Thursday denied reports, attributed to a Gulf source, that his country was producing 800,000 barrels per day above its quota. He said it was producing within 10,000 to 20,000 bpd of its quota.

But earlier this week a source at the country's state owned oil Petroleos de Venezuela (PDVSA) who saw official oil production figures said it would pump 3.245 million bpd this year. That would be some 886,000 bpd above quota. "It's an interesting mathematical proposition," said Nigel Saperia, managing director of the oil trading division of Bankers Trust International in London.

Saperia said the Opec deal had not changed anything and he expected a bearish reaction over the next few weeks. Prices have already dropped from $25 a barrel to $18 this year. "I still expect it to go lower," said Saperia. Other dealers took a similarly gloomy view. "It's another hollow agreement but at least there weren't any big rows," said another trader.

The short-term bearish outlook was amplified earlier this week when Iraq said it expected to resume exporting oil under a UN oil-for-food pact early next month. This ended three weeks of uncertainty which had helped buoy prices. Under the terms of the accord implemented last December, Iraq is permitted to sell $2.14 billion worth of oil over 180 days to raise money for food and medicine.

Iraq is chasing a cash target and could pump more oil later this year if oil prices slide further.

Brimming oil tanks are already beginning to weigh on prices for next winter. In Europe and the United States, winter heating oil stocks are about 20 per cent and 13 per cent above year ago levels, respectively. And traders say the summer gasoline season in the West stalled at the starting line. Even a large slug of unexpected oil demand from Nigeria this week to ease its fuel crisis failed to help prices.

But despite a bearish short-term outlook some traders believe a cold winter and further delays to planned oil production in countries outside of Opec could stem the losses.

Oil demand in Asia, eastern Europe, Latin America and China is booming and helping to offset more sluggish demand in Western industrialised nations. A cold winter in the West would boost demand further and might help.

The International Energy Agency (IEA) in Paris sees world oil demand putting in a big seasonal jump of 3.2 million bpd in the fourth quarter this year from the current third quarter. In addition, the big financial funds who have increasingly traded oil in recent years could be important.

Some dealers believe they are holding big short positions, or bets that prices will fall, in oil, attracted by the 28 per cent price slide this year. But "if they get spooked prices could go sharply higher because there is only a limited amount of cover," said Paul Newman, managing director of Intercapital Commodity Swaps Ltd in London.