News of OPEC Meeting Stems Slide in Oil Prices

Two OPEC committees were summoned Tuesday to the cartel’s headquarters in Vienna for a Sept. 7 meeting aimed at trimming the excess oil production that has sent world prices tumbling in recent weeks.

The panels have no power, but the news apparently contributed to a halt in the price slide. After two weeks of almost daily declines, prices edged up 4 cents Tuesday to $18.64 per barrel of West Texas Intermediate crude on the New York Mercantile Exchange.

OPEC President Rilwanu Lukman of Nigeria insisted Tuesday that the overproduction blamed for the recent price slide is no more than 1.2 million barrels a day above the official quota of 16.6 million barrels. Published reports have put the cheating at 3 million barrels a day.

But a recent price decline of nearly 20%, from more than $22 a barrel in mid-July, prompted the cartel to call the oil ministers of Nigeria, Indonesia and Venezuela to a meeting. The three were named at OPEC’s June meeting to urge any non-complying members of the cartel to abide by its system of quotas and fixed prices.

A second panel, with the same three member nations plus Saudi Arabia and Algeria, will meet to “monitor the price evolution in the market.”

A one-time Iranian delegate to OPEC, Bijan Mossavar-Rahmani of Harvard’s Energy and Environmental Center, said the committees have no authority to take action against offending members and are made up of “back-benchers” lacking political power within the cartel.

“The best the group can do is send the market a signal and try to take some of the jitters out of the market,” he said.

The official OPEC news agency conceded that the cartel’s production exceeded its ceiling in July, but said the increases “may have been the result of exceptional circumstances beyond OPEC’s control.” It said the Sept. 7 meetings would seek “ways and means of offsetting undesirable short-run fluctuations” in oil prices.

Energy analysts say the steep drop was partly a correction of the market’s previous over-reaction to the possibility that military action in the Persian Gulf would interrupt supplies of oil and make it dearer. The resulting prices in the $22 range were higher than desired by Saudi Arabia and other moderates.

Analysts say OPEC members were adhering to the official prices attached to more than 100 grades of OPEC crude, based on a “basket” of seven types of crude whose prices average out to about $18.

But because those prices were a bargain compared to the rising spot prices, there was higher demand for OPEC crude and the cartel members rushed to meet the demand by boosting production.

However, there is sharp disagreement over the extent of the overproduction. The quotas put in place last December call for production of 16.6 million barrels a day, but assumed that cheating would bring the total to perhaps 17.6 million barrels. Each nation’s true output and the current demand for OPEC oil aren’t known.

Another energy analyst and former OPEC delegate, Fereidun Fesharaki of the East-West Center in Hawaii, said the cartel members are producing even more than has been reported, and supply and demand are seriously out of balance. He said that unless production is dramatically reduced, the cartel will only be getting $16.50 a barrel for its oil within two months.

But Harvard’s Mossavar-Rahmani said the markets had overreacted to the reports of excess production, just as they earlier overreacted to the threat of military action in the Gulf. He said the meetings called by Lukman would probably nudge prices back up.

“That will keep the traders happy for awhile. They’ll go scurrying off to change their positions again,” he said. “What’s happening in the markets today doesn’t reflect fundamental supply and demand, it reflects psychology.”