C:\Annual Report 1998\AR1998 fo - Peace Palace Library

Oil Market Developments
In April, the price of the OPEC Basket recovered on the back of OPEC’s Extraordinary Meeting of the
Conference in late March which announced a production cut of 1.245m b/d by Member Countries. The
recovery continued into May when the monthly Basket price registered $13.14/b as there was news of
further production cuts by OPEC at a time when US refiners were increasing their demand for crude
in order to cover their gasoline requirements. However, WTI prices moved lower at the month’s end
as storage in Cushing, Oklahoma (the delivery point of NYMEX WTI futures) was full, forcing many participants
to sell their positions. The price of the Basket reversed its direction and reached a ten-year low of
$11.67/b in June as the market considered the actual production cuts by OPEC and non-OPEC during
April and May as insufficient to clear the stock overhang. The oversupply situation at a time when storage
facilities were full took prices during the month to 12-year lows. The OPEC Conference decision at the
end of June, to cut an additional 1.355m b/d, changed the price direction and it moved upwards. Total
production cuts agreed upon reached 2.6m b/d for OPEC Members and 500,000 b/d for non-OPEC
producers.
Prices improved in July as OPEC Member Countries showed their commitment to the agreement
through a series of announcements of deep cuts to their August exports. There was extra support
from higher utility demand in Asia, concerns about unrest in Nigeria, good refiners’ margins in the
Mediterranean and an expected decrease in North Sea supply due to field maintenance. The
improvement in prices was reversed in the first half of August due to several factors: a high build
in OECD stocks, especially products, led to fears of refinery run cuts at a time when North Sea
maintenance was approaching its end, and the market understood then that certain OPEC Countries
were not ready to cut production at a time when the production levels agreed upon in June were
perceived by the market as not enough to clear the stock overhang. A rally started in the second
half of August and continued throughout September on the back of higher cuts in export volumes
from certain OPEC Members and as surveys showed that compliance with the June agreement reached
90 per cent. This coincided with continuous draws on US crude stocks and bad weather conditions
in the USA, which led to production disruptions in the Gulf of Mexico and the closure of refinery
and import unloading facilities in the USA.
In October, despite a reported 98 per cent compliance with the OPEC agreement and expectations of
further cuts, heavy pressure on prices was exerted by fears of a possible recession in the economies of
many countries, which coincided with the increase in North Sea production and the return of production
from the Gulf of Mexico. The pressure increased in November, and the monthly Basket price dropped
by $1.22/b, as there was a build up in crude stocks in the USA and heavy flows of imported crude.
Mild weather and high stocks coincided with ample availability of North Sea supplies, thereby depressing
European markets. In December, the monthly Basket price fell to $9.69/b as high product stocks
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