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Enron Mail |
---------------------- Forwarded by Larry May/Corp/Enron on 09/11/2000 08:33
AM --------------------------- "PIRAOPEC" <listserv@pira.com<@mrpc.com on 09/10/2000 07:07:06 PM Sent by: Maiser@mrpc.com To: "PIRAOPEC" <listserv@pira.com< cc: Subject: OPEC LOG OPEC LOG: SUNDAY, SEPTEMBER 10TH THE AGREEMENT OPEC will complete deliberations on Monday but for all practical purposes the deal is done. They have agreed to raise allocations by 800 MB/D on a prorata basis beginning October 1st. The increase is until the next meeting which will be November 12th in Vienna. This rather early data was chosen because of the already scheduled Producer/Consumer Dialogue in Saudi Arabia November 17-19 and the beginning of Ramadan religious observance beginning November 27th and lasting for approximately one month. The price band and OPEC output response mechanism (20 consecutive business days above $28/BBL basket price, increase output 500 MB/D, 10 consecutive days below $22/BBL basket, decrease 500 MB/D) will remain in effect with obviously a clean slate to start the price tracking process. Saudi Arabia pretty much got its way at the meeting, asking for a 1 MMB/D increase and compromising on 800 MB/D. Of course the increase is prorata which implies an increase in the Saudi allocation of 260 MB/D, bringing its total allocation to about 8.5 MMB/D. Saudi crude output is estimated to have been almost 8.8 MMB/D in August(including 140 MB/D Abu Safa output produced on behalf of Bahrain). PIRA expects Saudi Arabia's crude output increase to be on top of its current over-production bringing total output to nearly 9.1 MMB/D. Since with the exception of Saudi Arabia and the UAE, all the OPEC members are essentially at capacity, the 800 MB/D OPEC allocation increase should translate into a production increase of only around 400 MB/D. Saudi Arabia and the UAE have allocations equal to 41.2% of the OPEC total(now 26.2 MMB/D excluding Iraq). With August/September OPEC crude output at around 29 MMB/D, fourth quarter crude output will be around 29.5 MMB/D assuming Iraq at 3.0 MMB/D. MARKET BACKGROUND Commercial oil inventories remain quite low with the three major OECD markets--U.S., Europe and Japan-- ending August with the lowest level in over 10 years. PIRA would not be surprised to see inventories revised up somewhat for Europe for the end of the second quarter, but this will not materially change the likely end August position. In addition to low inventories, the world is operating with very little spare producing capacity. With OPEC crude output at 29.5 MMB/D in the fourth quarter, there will only be some 0.5 to 1.0 MMB/D of instant spare producing capacity remaining. This number will certainly increase in time, but for at least the first half of the fourth quarter there is not much room for any interruption in expected supply for any reason (hurricanes, Iraq saber rattling, earthquakes, etc). Also, the lead seasonal product distillate(gasoil/diesel) is in great shape and with substantial refining margins there is plenty of headroom for crude. Add to the mix very low PADD II crude stocks, positive technicals and seasonals, at most only ten million barrels of current net speculative length in the NYMEX crude contract and continued strong economic growth and you have rather impressive positives for price. SHORT TERM MARKET BALANCES & PRICES With fourth quarter OPEC crude output at 29.5 MMB/D, world onshore oil inventories should draw only 100-200 MB/D in the quarter. Thus assuming normal early winter weather, stocks will remain very low but not, on average, decline significantly. For the three major OECD markets, commercial inventories should end the year 1-2% above the year earlier. In these circumstances and given the very positive market factors noted above, it is hard to see oil prices taking a big hit downward as a result of the OPEC agreement. PIRA would expect the very initial market reaction to be negative given that the agreed increase is somewhat more than anticipated. The market will then probably consolidate given that there is a good deal of confusion about the impact of the agreement. Given the current very strong fundamentals an upward price bias is likely to quickly return. However, one major wildcard negative for price first needs to be sorted out. THE POTENTIAL U.S. SPR SWAP If the United States is going to use the SPR to swap current barrels from the strategic reserve to be replaced in the future, the market will find out this week. With the U.S. Presidential election on November 7th, October pipeline scheduling completion on September 25th and probably ten days to carry out an auction, this is the last window of opportunity to have a meaningful impact before the onset of winter and the election. With SPR barrels being short haul, as opposed to 45 days away for any incremental OPEC oil, its impact on oil prices would be far greater than OPEC's current agreement. Moreover, if the decision is made to use the reserve in this fashion, the Secretary of Energy is likely to decide to make sure it has the desired impact of bringing prices down substantially by offering to swap very substantial volumes. PIRA rates the odds of a swap at 55%.
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