Cartel stands pat, but Asia may be key to oil's outlook
The Organization of the Petroleum Exporting Countries' decision over the weekend to keep production quotas unchanged was an important call disguised as a non-event and its potential effect on the global markets was starting to show in Monday's Asian trading.
The oil cartel, which controls about a third of the world's oil production, said Sunday at a meeting Vienna that it will leave oil-output levels unchanged and will fully comply with production targets the group agreed to late last year. See full story.
OPEC may have been more "concerned about the effects a cut might have on the already teetering world economy," said Darin Newsom, DTN senior analyst.
Oil prices and oil-related shares in Asia headed lower in the wake of the decision.
Among the bigger losers were shares of Inpex Corp.down 3.6% in Tokyo. Shares of BHP Billiton were down 1.4%, Santos lost 4.1% and Woodside Petroleum dropped 3.1% in Sydney. In Hong Kong, shares of Cnooc dropped 0.7%. But China Petroleum & Chemical Corp., or Sinopec, and PetroChina Co. -- both of which have significant refining and oil marketing businesses on the mainland -- advanced, with Sinopec rising 1.7% and PetroChina adding 1.6%.
In a note released Friday, Citigroup analysts rated Sinopec as their top pick among Asia-Pacific oil companies in an environment where crude-oil prices were below $65 a barrel.
"Price caps on domestic refinery product prices drove substantial losses in the refining division [last financial year]. However, we expect refining margins to normalize in [the current financial year," they wrote.
The brokerage also cut its oil price forecast to $48 a barrel from $65 a barrel for 2009, and to $55 a barrel from $85 a barrel for 2010.
"Low oil prices are causing cutbacks in global exploration and production capex, which we believe will eventually cause global supply to suffer and put upward pressure on prices when demand begins to recover," they wrote. "But in the short term, even if OPEC succeeds in reversing the global inventory build-up, its spare capacity should keep the 'risk premium' in oil in check and cap prices."
Crude for April delivery fell as low as $43.85 a barrel in electronic trading on Globex and were last at $44.61, down $1.64 from Friday's closing price on the New York Mercantile Exchange.
Still, traders "will be hesitant to get overly short oil as OPEC will try to enforce the cuts they already have in place," said Kevin Kerr, editor of Global Commodities Alert.
OPEC members had already agreed to three production cuts since September totaling 4.2 million barrels per day, but prices have continued to decline from the July high of $147 a barrel.
The International Energy Group, an energy adviser, said Friday that OPEC has shown an 80% compliance with its earlier production cuts.
Given all that, the cartel's decision could "spur more demand as a recovery may well be at hand," said Kerr.
"If they had cut production, they may have scuttled the recovery," he said. So while there may be weakness in crude from here, "much will depend on what we see in the [U.S.] inventory reports this week and for several weeks to come."
Kerr expects to see a steady decrease in supply -- and when OPEC meets again in May, members may very well decide to cut more of their production, he said.
It's clear that OPEC ministers looked at all the factors and "decided that since the oil price was already rising, inventories were falling, and they could realize another 800,000 barrels per day reduction by tightening their quotas, it would be prudent to stay with their present quotas and see where this all shakes out," said Charles Perry, president of Perry Management, an energy-consulting firm.
"OPEC also sees the value of not causing drastic movements in the price of oil, and this action will probably result in a steady increase in the price of oil, which is their objective," he said.
