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OPEC Production Agreement Already Showing Signs Of Stress

November 29, 1988

VIENNA, Austria (AP) _ Indications that quota-cheating would continue despite OPEC’s new production-limiting agreement sparked a selloff that sharply reduced the gains posted in crude oil prices when the pact was reached.

The uncertainty was sparked when the oil minister of the United Arab Emirates, Mana Saeed Otaiba, said the daily production ceiling set by the pact for his country ″does not represent its official quota.″

Otaiba’s comments, reported by the official emirates news agency WAM, were interpreted as a warning his country might pump more than its quota of 988,000 barrels a day. Violations of previous quotas have caused chaos on the oil market and a sharp decline in prices.

But on arrival today in Baghdad, Otaiba was quoted as saying his country was committed to the OPEC accord ratified Monday.

″We are committed to the text and spirit of the accord we signed,″ Otaiba was quoted as saying by the official Iraqi News Agency. ″The U.A.E. signed the accord, and it remains committed to what it stipulated regarding the production ceiling, the production quotas and pricing.″

On the New York Mercantile Exchange, the January contract for West Texas Intermediate, the benchmark U.S. crude, traded as high as $15.80 a barrel before settling at $15.03 on Monday, up $1.06 from Wednesday’s close.

The market was closed Thursday and Friday for the Thanksgiving holiday.

Each $1 rise in the price of crude oil theoretically means an increase of 2.5 cents a gallon in retail gasoline prices, although oil companies do not necessarily pass along the full increase.

The new agreement by the 13 members of the Organization of Petroleum Exporting Countries, effective Jan. 1, aims to curb the cartel’s recent breakneck production, reduce the world oil glut and drive up crude prices.

The accord’s success hinges on whether all member countries honor the quotas set out for them.

Analysts said they expected quota cheating by the United Arab Emirates, which is believed to be ignoring its current OPEC quota.

The country has a new quota of 988,000 barrels a day, a gain from 948,000 barrels.

Analysts estimate the United Arab Emirates already has been producing as much as 2 million barrels a day. They say it is unlikely it will reduce its output to less than 1.2 million barrels a day.

Paul Mlotok, an analyst for the investment firm Salomon Brothers Inc. in New York, said the new agreement was likely to hold, even with cheating by the emirates.

″As long as that is all, they (OPEC) won’t fare too badly,″ Mlotok said.

The production agreement was fashioned in nearly two weeks of meetings by OPEC ministers.

Under the pact, the cartel would limit production in the first six months of next year to 18.5 million barrels a day, up from its current official ceiling of 16.6 million barrels but down sharply from its actual production, estimated at 22.5 million barrels a day. It also retains OPEC’s benchmark price of $18 a barrel.

The new deal also brings Iraq back into the quota system. That nation refused to join the current accord, arranged in 1986, because it wanted the same, larger production ceiling as its war rival Iran.

The ministers stepped up efforts to set a new quota for Iraq after Iran and Iraq agreed in August to a cease-fire in their 8-year war. The two countries now badly need additional oil revenue to rebuild their damaged economies.

After lengthy behind-the-scenes negotiations, the ministers gave both the same 2.64 million barrels a day quota. Iran had a cap of 2.4 million barrels under the old agreement and Iraq 1.5 million.

Other OPEC members are Saudi Arabia, Algeria, Ecuador, Gabon, Indonesia, Kuwait, Libya, Qatar and Venezuela.

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