Crude oil to stray below Opec range

01 October 2001 00:00  [Source: ICB]

By the end of the year, crude oil prices will slide down to $19/bbl, well outside Opec's stated price range of $23-28/bbl for the Opec basket, said Naji Abi-Aad of Observatoire Mediterraneen L'Energie (OME), speaking at Tecnon Orbichem's Petchem 2001 conference in Monte Carlo, Monaco.

Such a significant drop will have serious implications for European petrochemical producers, whose energy and feedstock economics are closely related to oil and naphtha prices.

In recent days, oil prices have fallen below $22/bbl, which Abi-Aad suggests could be the beginning of the unravelling of the Opec price strategy, which has been relatively successful for almost two years. The current global crisis triggered by the terrorist attacks in the US 'will only accelerate the process of oil pricing moving away from Opec's control', states OME.

Opec's capacity to manage the oil markets and maintain prices will be undermined by a number of factors, states Abi-Aad. To maintain prices, Opec has had to cut output by maintaining production quotas among member nations, resulting in idled capacity.

According to OME, Opec will find it unsustainable to have large volumes of mothballed capacity. There will be a 'growing temptations to cheat on quotas,' says Abi-Aad. 'Once again weak compliance could haunt Opec', undermining production cutback announcements.

OME says the estimated 6-7m bbl/day of non-Opec capacity to come on-stream in the future could also throw its price management off balance. Overall crude oil demand will increase by 11m-16m bbl/day, in the next decade. In this climate OME believes 'maintaining a price of above $15/bbl will involve Opec in a vicious cycle, where it will be forced to increasingly choose between continual reductions in production, or accept lower prices.

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