Faced with increased pressure to cut the price of crude oil, the Organization of Petroleum Exporting Countries decided Monday to move up its regular semiannual meeting by almost a month, apparently a signal that the 13-member cartel knows that it must act quickly to keep its price structure intact.
OPEC's decision to hold the meeting in Geneva on June 30 instead of July 22 came at the end of two days of talks attended by oil ministers from nine OPEC countries in Taif, the summer capital of Saudia Arabia, and came on the heels of oil price cuts by non-OPEC countries Norway and Britain.
"It certainly reflects high anxiety," said Daniel Yergin, president of Cambridge Energy Associates in Cambridge, Mass., a consulting firm. "They want to hold their system together, and there's a feeling that, if they waited until July, things might get unraveled."
Industry analysts said pressure to cut oil prices results primarily from stepped-up production during a time of flat demand. Petroleum Analysis, a New York-based consulting firm, estimates that worldwide demand for crude oil is increasing by only 1% this year while production is up as much as 4%. Between a third and a half of the increase is from North Sea and U.S. sources, analysts said, thus reducing demand for OPEC oil. The cartel's members previously cut their self-imposed production quotas considerably, to 16 million barrels a day from a high of 31 million barrels a day five years ago, in an attempt to prop up their pricing system.
Petroleum Analysis said non-OPEC production is running 1 million barrels a day ahead of last year, but Yergin put the figure lower, at between 600,000 and 700,000 barrels a day.
However, several OPEC nations, particularly Nigeria and Ecuador, have been ignoring their production quotas, forcing Saudi Arabia, the country with the largest oil reserves, to cut back on production to maintain OPEC price levels. Nigeria has been discounting its crude by $3 to $4 a barrel to increase its output, analysts said.
They estimated that Saudi Arabia's current daily production ranges between 2 million and 2.5 million barrels, significantly below its official quota of 4 million barrels a day.
OPEC's price structure will face further pressure this week, analysts said, as the state-owned British National Oil Corp. is expected to announce a $1.40 drop in the price of of its benchmark North Sea oil to $26.50 a barrel. North Sea Brent, the most widely traded North Sea crude, competes with Nigerian light crudes, which are priced $2.15 a barrel higher.
Analysts said Norway began the latest pressure on world prices last October when it decided to abandon fixed prices and set prices of its North Sea oil monthly according to fluctuation in the "spot," or non-contract, market. Analysts believe that Norway's state oil company last month cut its average price for June deliveries by $1 to $26.50 a barrel.
Analysts said they expect the price of crude oil to drop another $1 to $2 on average before year-end, but they don't expect OPEC to make any immediate price-cutting moves. "If they stayed within their quota--16 million barrels a day--they could probably stabilize prices," Yergin said.
Most analysts said that, if the cartel does cut prices, it will be on its heavier crudes, which are used to make fuel oil. "The heavy crudes are under very big pressure," said Dillard Spriggs, president of Petroleum Analysis.
OPEC's heavy crude is currently priced at $26.50 a barrel, only $1.50 below Saudi Light crude, OPEC's benchmark crude oil. Normally, analysts said, there is a $3 differential between the heavy crudes and Saudi Light, but the price of heavy crude was pushed up during Britain's yearlong coal strike, which ended several months ago.
What effect any price cuts this year may have on gasoline prices is unclear. Government estimates indicate that the retail price of gasoline should drop by 5 cents a gallon if the price of crude drops by $3 before year-end. But oil industry analysts said low gasoline inventories and eroding dealer profits should keep gasoline prices firm at least through Labor Day.
OPEC oil ministers, at the conclusion of Monday's talks, emphasized the need to maintain the cartel's current price structure. The Associated Press quoted Mana Saeed Oteiba, oil minister of the United Arab Emirates, as saying that "the central issue was how to defend OPEC and its price structure. We will maintain the present price and production levels, but maintaining the price is far more important than maintaining production."
However, Spriggs doubted that OPEC could reduce its production much further and still satisfy member nations' revenue needs.
A Venezuelan official warned Monday that a cut in OPEC's official price "would be catastrophic" for his country. Leonardo Montiel Ortega, a member of Venezuela's congressional committee on energy and mines, said: "We'd find ourselves in serious difficulties to meet our commitments for refinancing our foreign debt."