Investor's Business Daily
September 25, 2003 Thursday
OPEC To Lower Quota In Pre-emptive Action Ahead Of Iraqi Output; Oil Rises 4%, Hurting Stocks; Jolt expected to wear off, however, as Iraq's crude replaces others' supplies
BYLINE: BY JED GRAHAM
A surprise decision by OPEC to cut oil output sent crude prices higher Wednesday, raising worries about persistently high energy prices and helping reverse recent stock market gains.
The Organization of Petroleum Exporting Countries said it would reduce the output quota for 10 nations by 900,000 barrels, or 3.5%, to 24.5 million barrels per day starting Nov. 1. In response, crude oil for November delivery rose $1.11, or 4.1%, to $28.24.
The cut came after crude prices fell more than 15% from above $32 in early August. Also, production is ramping back up in Iraq, the one OPEC member not bound by the quota.
The move helped sour the mood on Wall Street, where the Nasdaq tumbled 3.1% and the S&P 500 1.9%. Treasuries rose, with 10-year yields falling to a two-month low of 4.14%.
Iraq's Impact
With oil prices near the top of OPEC's stated target of $22-$28 a barrel, markets had expected the meeting in Vienna, Austria, to produce no change in output.
Even some OPEC ministers said they saw no need for a change.
"What happened was last night there was a presummit meeting where they readmitted Iraq as a full member" of OPEC, said Peter Zeihan, energy analyst at Stratfor, a geopolitical and industry consulting group.
OPEC members also learned about Iraq's ambitious plans for raising its output, he said.
It's no coincidence, Zeihan said, that OPEC's cut matched the 900,000 barrels a day Iraq is now exporting.
The move also reverses a temporary 900,000-barrel increase in OPEC's official quota announced in April to offset a virtual shutdown of Iraqi operations.
"There shouldn't be a very sharp jolt in oil prices," Zeihan said.
Once it sinks in that Iraqi output is merely replacing non-Iraqi OPEC output, Zeihan expects oil prices to fall.
Iraq's oil minister, Ibrahim Bahr al-Uloum, said Wednesday that Iraq's production now stands at 1.8 million barrels per day, about 700,000 barrels less than its pre-war capacity.
Exports account for half of current output because some oil is used internally and sabotage has hurt efforts to keep oil flowing in northern Iraq.
Iraq plans to boost output and exports by a million barrels a day between now and March. Zeihan expects its increases in exports to be matched by cuts in other OPEC members' output. OPEC's next meeting is Dec. 4.
"OPEC has pretty much shown its hand for the next six months," he said.
But OPEC's willingness to make way for higher Iraqi output will begin to be tested next spring, Zeihan said.
Iranian Oil Minister Bijan Zanganeh called Wednesday's cut a "first step."
"We believe that we have about 2.5 million barrels per day oversupply in the first quarter of 2004, and it's better to start before to prevent a bad situation," he said.
Iraq plans to keep on boosting output to as much as 4 million barrels a day by 2005 and to 6 million by the end of the decade.
"It is now no secret we intend to develop fast our huge resources with the help of the (world) oil industry and other investors," Bahr al-Uloum said.
The combination of low U.S. inventories, heavy summer demand and some refinery snags have kept oil prices elevated and pushed gas prices to record highs in the past month.
But while OPEC's supply cut led some economists to raise the specter of high energy costs sapping the consumer, Zeihan doesn't see crude prices as a threat to the U.S. economy.
Last week saw crude stocks continuing to be rebuilt.
The Energy Department reported a 1.5 million-barrel rise in crude stocks to 280.8 million barrels. The American Petroleum Institute reported an 800,000-barrel climb to 282.9 million barrels.
While stocks are historically low, steady increases in oil imports from Russia and Iraq mean supplies don't need to be as high, Zeihan said.