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Oil markets mull message from Moscow, as new output showdown looms
February 22, 2002
AFP

The oil market is nervously anticipating a new showdown between OPEC and Russia over output, as Moscow shows signs of baulking at a deal struck late last year to rein in production to boost crude prices.

Oil prices fell heavily on Wednesday after Russian officials signally failed to extend beyond March current restrictions on crude oil exports at a Moscow pow-wow.

Though prices recovered somewhat on Thursday, analysts say that the market is increasingly turning its attention to the future of a landmark pact forged last December by the world's leading crude producers to rescue prices by reining in oil volumes.

Russia, the world's second-largest oil producer, was a crucial part of that deal: its involvement was enough to persuade the Organisation of Petroleum Exporting Countries (OPEC) to trim output by 1.5 million barrels a day, and also encouraged other non-OPEC countries like Norway and Mexico to squeeze supply.

But Moscow's export cutbacks were only valid for three months, leaving experts to wonder what will happen on April 1. A meeting Wednesday produced no decision on extending the export curb.

"You are still left in the dark as to what is going to happen going into the second quarter," said David Thomas, an oil expert with Commerzbank in London.

"The market is just nervous about it. It shouldn't take it as de facto that there won't be an extension in the second quarter," he told AFP.

"But there is going to be some volatility in oil prices as you see the rhetoric bashing between the various OPEC states and Russia."

Oil experts in Moscow argue that most Russian oil companies were extremely reluctant about cutting exports in the first place, given high levels of investments and the importance of hard currency to their balance sheets.

Russia and OPEC locked horns for weeks over the issue through November and December last year. Both sides knew that to rescue prices from a steep September 11-induced slump, output would have to be reined in.

But neither wanted to be the first to jump, because cutting output naturally runs the risk of surrendering market share.

Russia is eager to recapture market share, and also believes it can live with lower oil prices than a rival like Saudi Arabia, OPEC kingpin and the world's biggest producer.

"We believe that the country will have no other option but to increase its exports of crude oil, given that domestic oil companies are sticking to their current production plans (which assume six percent growth in crude oil output in 2002)," said James Henderson, an analyst with the Moscow-based brokerage Renaissance Capital.

OPEC officials are due in Moscow in early March to try to secure some form of commitment to the output cutback pact ahead of a meeting of OPEC ministers in Vienna in mid-March.

Some analysts believe the deal will be patched up until the end of June, but thereafter non-OPEC countries will revert to type and the oil market will have to rely on stronger demand to mop up the excess volumes.

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