Oil Prices Decline on Expected Output

Location: Vienna
Author: Ellen J. Silverman
Date: Tuesday, October 31, 2006
 

Oil prices slipped below $60 a barrel Monday on doubts that OPEC would pursue proposed production cuts and as geopolitical concerns lifted.

Light, sweet crude for December fell 89 cents to $59.86 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe.  Brent crude fell by $1.10 to $59.98 on the ICE Futures exchange in London.  Traders are watching to see how quickly OPEC moves to cut production after announcing that they would reduce output by 1.2 million barrels day.

"Saudi Arabia, the United Arab Emirates and Iran have told some of their customers that they will cut production in coming months," said Victor Shum, an energy analyst at Purvin & Gertz in Singapore.  But this hasn't had much impact on prices "because the market already priced in some output cuts from OPEC," he said.

In its daily energy report, Vienna's PVM Oil Associates suggested that the market may not be convinced all the production cuts would be enacted, noting that "data for October ... reportedly showed that OPEC output in fact increased slightly to 30.18 million barrels per day from September levels."  Peter Lengyel of PVM speculated that the downward trend could be nothing more than a correction after "a relatively sharp increase of almost 7 percent" last week.

Prices rose Friday after a British navy official said that a threat from al-Qaida last month targeting Gulf oil terminals resulted in increased security and vigilance at Saudi Arabia's Ras Tanura terminal as well as a refinery in Bahrain.  "There has been no disruption in oil flows" from the region, said Shum. "It reminds the market that geopolitics haven't completely disappeared from the scene."

Significant cuts along with the arrival of winter weather to the Western hemisphere could raise the floor under the market, however, with demand for heating oil and natural gas leading the way.  "What is going to affect pricing in the coming weeks will really depend on how cold it gets in the Northern Hemisphere winter and the broader global economic outlook," said Shum. "Weather again will be the wild card."

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