Opec May React Slowly To Iraqi Oil
For years, it has been conventional wisdom among traders that Iraq’s return to the oil market would hammer the price and give OPEC a major headache.
The questions market seers posed time and again were who would have to cut production, and by how much, to make room for the return of the nation with the world’s second-largest oil reserves?
But after briefly digesting Monday’s news that Iraq finally will be back, on a limited scale, traders bought crude in a frenetic rally that pushed prices above $22 a barrel on the New York futures market.
This could make OPEC rather complacent about the whole matter when ministers meet in two weeks - although analysts said the cartel eventually will face problems when Iraq is able to sell all the oil it wants.
“OPEC is unlikely to react unless the price drops very quickly,” said Leo Drollas, chief economist at the Center for Global Energy Studies in London. Drollas predicted the price would have to tumble below $15 a 42-gallon barrel before OPEC ministers “wake up in a sweaty panic.”
Iraq has been barred from exporting crude oil since its August 1990 invasion of Kuwait, but it now has agreed to a deal to sell $1 billion worth to buy food and medicine for its suffering people.
Futures traders quickly pushed oil down by almost 80 cents a barrel in a knee-jerk reaction. But almost as quickly, oil bounced back as traders realized Iraq won’t be selling any for a month or more at a time when world demand remains strong.
“People are saying that’s the bad news out of the way - let’s buy it,” said Lindsay Horn, executive director of energy derivatives for Lehman Brothers in London.
On the New York Mercantile Exchange, light sweet crude for June delivery shot up $1.84 to close at $22.48 a barrel.
For OPEC, the timing of the Iraqi deal was good. Not only is the market full of buyers after a cold winter that depleted petroleum stockpiles, but oil ministers are scheduled to meet in Vienna in two weeks.
Earlier, there had been talk of an emergency OPEC session to discuss production cuts when Iraq returns, but now, there’s no emergency in sight. OPEC declined comment Monday as prices soared.
“If you look at the supply and demand situation, demand’s pretty good,” said Victor Yu, a vice president at the commodities trading company Refco Inc. in New York. “They shouldn’t have any problem taking this Iraqi crude.”
When Iraq was knocked out of the market by U.N. sanctions nearly six years ago, other members of OPEC got a bit of a free ride as they pumped more oil to make up for a global shortage.
In the month before the invasion of Kuwait, Iraq produced 3.4 million barrels a day, a number that has now fallen to 400,000 barrels a day, mainly for domestic consumption. The U.N. deal could lead to Iraq producing and exporting an extra 650,000 barrels a day.
With Iraq out, Saudi Arabia was the big winner, increasing production to 8 million barrels a day from about 5.45 million, but others also boosted output.
Although traders were caught off guard by Monday’s big rally, Horn at Lehman Brothers cautioned that eventually Iraqi sales will have a negative impact.
“If you assume this is the beginning of the end of Iraqi sanctions - Iraq is the second-largest producer in the world,” Horn said. “If Iraq comes back, Iraq ain’t sticking to OPEC quotas.”
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