Oil Prices Will Fall As OPEC Will Raise Production; AOC Is Cut By Half.

Major members of OPEC have decided to raise oil production and to help prevent a global recession this year. As a result, oil prices are expected to fall shortly, despite the wild upward spiral in US gasoline and gasoil prices during the week.

A top-ranking official at the Riyadh-based secretariat of the Gulf Co-operation Council (GCC) tells APS Saudi Arabia and fellow GCC members Kuwait, the UAE and Qatar are to raise their oil production "with or without an (OPEC) agreement". He adds: "This will be in the interest of all the exporters. Otherwise the risk of a global recession will be high and will hit us all. We (the six GCC states including Oman and Bahrain) will take all necessary measures in line with (US) efforts to help prevent a recession" (see background of events that might lead to a US slump and a subsequent global recession in OMT No. 5 of 31 Jan/7 Feb. 2000).

US Energy Secretary Bill Richardson recently toured the Gulf and met with the oil ministers and political leaders of Saudi Arabia and Kuwait. He had a warning from the White House that a recession would hurt all concerned. He gave the same warning to Mexico, Venezuela, Norway and other exporters.

A prominent Arab diplomat in Kuwait tells APS a proposed drawdown from the US strategic petroleum reserve (SPR) to bring prices down "would be very embarrassing" to the GCC states, particularly Saudi Arabia, Kuwait, the UAE and Qatar. He explains: "In a way, use of the SPR denotes a crisis. Since this is an election year (in the US), the issue is hot and American politicians would point their accusing fingers to us. They would say we are behind the crisis, or blame us for not having helped to prevent it".

Spot WTI rose to $33/b (with gasoline nudging $1.50/gallon on average nationwide) on March 7, one day after the US Energy Department warned that gasoline prices could reach $1.80/gallon during the peak driving summer months. On March 10 US experts said spot WTI could exceed $35/barrel in late April or May - unless OPEC increased production. The IEA in Paris has already warned that crude oil prices could go a high as $35/b.

OPEC's production curbs, combined with a cold snap on the US east coast since late January this year, have driven stocks to a 20-year low. With speculators raising their price bids at every negative or vague signal from the OPEC side, the oil market is trapped in a strange psychology. A Saudi Aramco executive tells APS: "Prices are rising more as a result of manipulation in the market than because of real fundamentals". We don't understand what's going on. I don't believe prices have been driven by market fundamentals in the past six months". In Abu Dhabi, an Arab oil executive says: "The (US) majors are behind the latest wave (of oil price rises) to compensate for generous election campaign contributions they are paying for the candidates".

OPEC's full ministerial meeting is due to be held in Vienna on March 27. A key meeting in London on March 2 by Saudi Oil Minister Ali Naimi and his Mexican and Venezuelan counterparts left the market waiting for the OPEC conference. (See Syria survey from the following page).

AOC Restructures: Arabian Oil Co. (AOC), which until Feb. 28 was Japan's largest oil producer, is cutting its workforce in the Divided Zone by more than half. It is eliminating 45% of its domestic staff, with 150 jobs cut. Saudi Aramco's new division in charge of "Gulf Affairs" is taking over half of AOC's offshore operations in the Khafji area, where the Japanese company's 40-year Saudi concession expired on Feb. 28. AOC President Keiichi Konaga, who flew to Saudi Arabia for last-minute talks just before the expiry date, failed to get the concession renewed as the Tokyo government (MITI) could not meet Riyadh's demand for Japanese investment in a $2 bn mining railway project.

AOC production now has been cut by half to less than 150,000 b/d. This involves Kuwait's 50% share of the Divided Zone for which the concession expires in Feb. 2003. Whether of not AOC would also lose that part does not seem to matter much to the Japanese economy, the second largest in the world, which has changed drastically since the early 1960s when oil was so important to Tokyo.

AOC expects Y700m ($6.5m) in extraordinary losses in the year ending in December as a result. Pre-tax profits will be Y41 bn on sales of Y128 bn in the same period. These would rise to Y46 bn and Y133 bn, respectively, in the following year. (See detailed profile of the Divided Zone in the 1999 surveys of Kuwait in Vol. 52 and of Saudi Arabia in Vol. 53).