Indications that the Organization of the Petroleum Exporting Countries could agree at a meeting Saturday to ramp up oil production by 2 million barrels a day led to a price drop for the second straight day Tuesday.
The sense that OPEC, led by Saudi Arabia and the United Arab Emirates, would act to alleviate a supply shortfall created by the 5-week-old Venezuelan strike seemed to mollify nervous markets.
“When OPEC didn’t react at the onset of Venezuelan strike–that frightened the market,” said Amy Myers Jaffe, senior energy adviser at the James Baker III Institute for Public Policy at Rice University.
“In 1990, the day after Iraq invaded Kuwait, OPEC reacted right away. But in this case, OPEC sent [Venezuelan President] Hugo Chavez a letter telling him to hang in there.”
West Texas Intermediate Crude fell $1.03 a barrel, to close at $31.08 on the New York Mercantile Exchange.
But some analysts suggested that even with increased OPEC production, the U.S., with its depleted inventories, still has a problem.
For one thing, Middle East oil is 40 days away from delivery, whereas Venezuelan oil was only a week away.
What’s more, OPEC’s action reflects a lack of confidence that Venezuela’s problems will be resolved soon.
Some industry groups and several supply-strapped refiners have been urging the Bush administration to lend the companies oil from the Strategic Petroleum Reserve.
“January is the critical month for building gasoline stock,” said Larry Goldstein, president of the Petroleum Industry Research Foundation.
“We’ve been arguing since early December that it was a timing issue, not a supply issue. The oil companies lost their short-haul supplier, Venezuela. The only short-haul supply source available now is the U.S. government.”
Goldstein noted that in September, when the U.S. Gulf Coast was beset by hurricanes, the government agreed to lend oil to refiners that had to shut down production.
“Everyone wins,” Goldstein said. “The companies that need the oil now get it, and the country gets it back.”
The argument fails to sway Michelle Michot Foss, director of the University of Houston’s Energy Institute.
“I would argue that it is better for OPEC to do its thing,” she said. “The reserve should be used judiciously.”
Foss takes that position even though she fears OPEC’s action demonstrates a belief that Venezuelan supplies won’t return to the market any time soon.
Kyle Cooper, energy analyst with Salomon Smith Barney in Houston, said the Venezuelan situation near term “is very bullish for prices.”
“But in the long term, the implications are bearish because the Venezuelan economy has been decimated by the strike,” he said. “Once the strike is over, Venezuela is going to be under pressure to open up the spigots and get the economy going again.”
