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OPEC Accord Likely Push Prices Up To Benchmark Target, Survey Says

May 25, 1992

NICOSIA, Cyprus (AP) _ OPEC’s decision to boost oil production by a modest 481,000 barrels a day will likely push prices up to the $21-a-barrel target or beyond, the Middle East Economic Survey reported Monday.

But the respected oil industry newsletter said that the accord, hammered out last Friday in Vienna and setting July-September production at an estimated 23.46 million barrels a day, has ″a credibility problem.″

Survey Editor Ian Seymour wrote that the new ceiling is below forecasts for oil demand, which run as high as 23.7 million barrels a day. Estimates for the fourth quarter run as high as 25.9 million barrels a day.

The new ceiling ″leaves a potential chunk of demand on the table, and ... whenever the ceiling is set appreciably below anticipated market demand, that slice of demand in the end inevitably gets satisfied by somebody,″ Seymour wrote. ″A low ceiling is in itself a powerful incentive for cheating on quotas.″

Seymour stressed that ″OPEC’s Vienna decision could serve to create an even tighter market in the third-quarter than originally expected, in which the target price of $21 a barrel for the OPEC basket could well be achieved or exceeded.″

The May 22 accord nudged prices up to around $18.50 a 42-gallon barrel, a modest increase.

He added that when ministers of the Organization of Petroleum Exporting Countries meets in September in Geneva to discuss the fourth quarter, ″there will be considerable pressure, particularly from Saudi Arabia, to have quota restrictions lifted ... to permit expected demand to be fully satisfied.″

The increase in the overall OPEC output from 22.98 million barrels a day, set in February, was mainly to accommodate Kuwait’s rapidly increasing production following the 1991 Gulf War.

The emirate’s quota was raised from 812,000 barrels a day to 1.18 million.

Additional oil could hit the market when Iraqi crude becomes available. Iraqi exports were blocked by U.N. sanctions imposed after Saddam Hussein’s army invaded Kuwait Aug.2, 1990. Other OPEC states picked up the slack when Iraq’s exports were halted.

The newsletter also noted that Saudi Arabia, the world’s largest exporter, wants its quota raised to 8 million barrels a day from 7.88 million - a move opposed by most cartel members.

The Saudis deny reports they are stockpiling by producing as much as 400,000 barrels a day extra. But Seymour noted that they ″concede that a decision in this regard could be taken soon.″

The Saudis, he said, will be watching for quota violations, particularly from Iran and Nigeria, who have ignored ceilings in the past.

″If such violations are established, the kingdom might feel free to do likewise,″ Seymour added.

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