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Oil sector responses to current sanctions situation

Dear all

Two articles from BBC Online and from an energy industry website 
accessed via

BBC report says of the prospects for the UK/US resolution 'Most 
likely, the outcome will be less definitive and the response impossible 
to call.'

Energy24 says, 'While it is not yet clear if the Russians are opposed to 
plan because a lack of technical detail, or if Moscow is opposed to the 
proposal under any circumstances, the smart sanctions increasingly 
look dead in the water.'

Either way, OPEC is not hurrying to fill in the Iraqi suspension gap, 
are pointing to the fact that suspension has not affected prices much 
(confirming their claim price increases more to do with refinery 
bottlenecks than undersupply), and are watching to see what (a) Iraq 
does and (b) what non-OPEC suppliers do before making any big 
production decisions.

1) BBC News Online

Opec members harden against output rise
By Toby Shelley

Published: June 26 2001 11:45GMT            |    Last Updated: June 26 
2001 19:59GMT

Opinion within the Organisation of Petroleum Exporting Countries is 
hardening against raising output when ministers convene for an 
extraordinary meeting next week.
Officials at the Opec secretariat and sources close to three large 
Opec producers, told the Financial Times that market fundamentals 
had not changed enough over the last month to warrant higher 
On June 5, Opec members decided to maintain the production ceiling 
of 10 members at 24.2m b/d, rather than respond immediately to 
Iraq's suspension of its 2.1m b/d exports in furtherance of its dispute 
over US-UK 'smart sanction' proposals. They agreed to reassess 
market conditions on July 3-4 and vowed to pump extra oil if it was 
Almost a month on, Iraqi exports through the Turkish port of 
Ceyhan and Mina al Bakr in the Gulf remain suspended with no-one 
prepared to forecast when they will resume. The UN Security 
Council is due to vote on the proposals on June 3, hours after Opec 
ministers are due to convene in Vienna. Russia may well reject the 
proposals but it is unclear whether a stalemate could provide the 
conditions for a restart of exports.
Despite some 3 per cent of global oil production being withdrawn 
suddenly from the market just ahead of the stockbuilding season and 
amid a concatenation of energy crises in the US, crude oil prices have 
not soared. Indeed, the daily price of Opec's reference basket of 
seven crudes has fallen back from the $27 a barrel area to the $25 
area in recent days, right in the middle of Opec's target range.
Maintenance of prices in that range is crucial to consensus within 
Opec and it also allows the cartel to boast that it is imposing stability 
on a market capable of great volatility, to the benefit of all. The 
potential problem, said an official of a Gulf Arab national oil company, 
is two-fold. Firstly, "When the market is low, Opec is proactive but 
when prices are higher, it is reactive". Secondly, he said, the 
mechanism Opec uses to assess whether prices are exceeding its 
range - the Opec basket over 20 trading days - is backward looking 
while the danger lies ahead.
"There is plenty of supply in the market" said a senior source with 
one Gulf Opec country, adding that stock builds in the US have been 
stronger than expected. "Market fundamentals are looser" said an 
adviser to the national oil company of another large Opec producer.
Analysts in Opec countries are also sceptical of forecasts of a severe 
tightening of supply in the fourth quarter, saying stocks have been 
stronger and demand will be weaker than seen by, for example, the 
Centre for Global Energy Studies (CGES). One source who 
personally favours raising the ceiling by 1m-1.5m b/d now, 
nonetheless believes indications that the US downturn will be longer 
lasting than earlier thought, to militate against such a move next week.
Dr Shokri Ghanem, director of Opec's research division, is categoric. 
The removal of Iraqi crude from the market with no accompanying 
crude price surge proves Opec's argument that high energy prices, 
particularly in the US are caused by refinery and pipeline bottlenecks, 
not lack of oil.
He also undercuts the detailed arguments over the levels of stocks. 
Global commercial and strategic stocks amount to 5.7bn barrels yet 
the market moves on changes of a few tens of millions of barrels in 
the US due to speculation, he said. "One hundred million barrels is 
not a matter of concern." Running down of stocks is a policy decision 
not a reflection of supplies, he argued, pointing to the move by oil 
consumers towards just-in-time delivery in the mid-1990s. He added: 
"If stocks fall by 8 per cent or 10 per cent, I will worry".
All this said, no-one disputes that a prolonged Iraqi absence from the 
market would squeeze supplies and boost prices in the absence of 
extra production by the other 10 Opec members. But Opec has 
given the assurance it will compensate for any shortfall that 
imbalances the market. The open questions would be ones of quantity 
and timing. If they have to make up for Iraq, other Opec member will 
first want to assess how much of shortfall has already been countered 
by non-Opec producers and, indeed, through quota busting by 
members. It is the issue of timing that is contentious, said one Opec 
It is far from certain that Iraq's intentions will be clear by the time 
ministers leave Vienna. A UN reversion to the original oil-for-food 
programme for a standard six month period would ensure a restart 
but would look like a defeat for the US and UK. Proceeding with the 
proposed 'smart sanctions' would guarantee continued suspension for 
an unknown period. Most likely, the outcome will be less definitive 
and the response impossible to call. That, says one Opec source, 
means a likely outcome of next week's meeting would be a decision 
touse the pricing mechanism as trigger for increased production of, 
perhaps, 1m b/d.
For those, like CGES, who forecast market tightening in the fourth 
quarter without higher Opec output even before Iraq suspended 
exports, delaying a production rise until the Opec basket had 
exceeded $28 a barrel for 20 trading days would be too little, too 
late, bringing a return to Brent crude prices of $30 and higher.

2) ENERGY24 business information website
26/06/2001 13:27:20 (GMT)
Crude prices pushed slightly higher as the market geared itself for the 
prospect that OPEC may leave production levels unchanged until 

IPE Brent for August delivery opened today on $27.03 before pushing 
thirteen cents higher by early afternoon. But the real market shaping 
news was whether Iraq was prepared to resume its crude exports, 
with events overnight suggesting Baghdad maybe inching closer 
toward a resumption.
Russian has told its partners on the UN Security Council that it would 
oppose the 'smart sanctions', while US Secretary of State Collin 
Powell admitted that consensus has not yet been reached and there 
was no plan B in place.
While it is not yet clear if the Russians are opposed to plan because a 
lack of technical detail, or if Moscow is opposed to the proposal under 
any circumstances, the smart sanctions increasingly look dead in the 
So where does all this leave OPEC and its supplies? Observers now 
say the cartel is unlikely to move on output before September and 
this has been echoed by reports that individual oil ministers within 
OPEC are digging their heels in to resist calls for a production 
Lawrence Eagles of GNI Research said if OPEC does leave output 
untouched, it may not cause too many ripples in the wider market.
'Given the current supply and demand balance, this does not appear 
likely to cause significant tightness in the oil market. Certainly 
consumers will have more oil under an Iraqi return than they will if 
the cartel fills the void,' he said.

Sorry about the formatting.

Milan Rai
Joint Coordinator, Voices in the Wilderness UK
29 Gensing Road, St Leonards on Sea East Sussex UK TN38 0HE
Phone/fax 0845 458 9571 local rate within UK
Phone/fax 44 1424 428 792 from outside UK
Pager 07623 746 462
Voices website

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