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11/15/2001

OPEC Update

*Hott Spotts returns 11/29

From time to time it is necessary to update the energy situation
and OPEC''s efforts to control the price of a barrel of crude. As
of this writing, OPEC''s latest attempts are failing miserably.

As the price of crude drops to the lowest levels in over two years,
OPEC is desperately attempting to maintain its market share,
which has been slipping from about 40% to its current 30%. But
as the price of West Texas (or Light Sweet) crude tumbles below
$20, and with Brent North Sea now under $19, one can see how
difficult OPEC''s effort to get its ''basket'' of crude up to the $25
price target will be, especially given the global economic malaise
as well as the independence being exhibited by non-OPEC giants
Russia, Norway and Mexico.

At the start of 2001, OPEC (ex-Iraq) was producing 26.7 million
barrels per day (bpd), with worldwide demand hovering around
75.6 mm, meaning OPEC was responsible for 35% of global
production. But as the price slid due primarily to slowing
demand, OPEC opted to cut production three times to the 23.2
mm level. Only one problem, non-OPEC refused to cut as well,
so OPEC''s market share has slipped to 30%. [Again, ex-Iraq.]

Global demand was initially slated to rise to 77 million bpd in
2001, but the latest estimate is for basically flat demand at 75.7
mm. And the outlook for 2002 is not looking any better.

For its part OPEC also shoots itself in the foot when it
establishes production targets and then cheats on them, which
has been the case throughout this year. What held the cartel in
good stead for 1999 and 2000 was the membership''s discipline
in holding to production goals, but in 2001, nations like Iran
have gone back to those days when targets were largely ignored.

Meanwhile, non-OPEC Russia, Norway and Mexico have been
pumping away, especially as the price held in the $22-$25 range.
It was simply too good a deal to pass up. Russia and Norway are
the #2 and #3 producers in the world, by most counts, and,
together with Mexico, all have affirmed in the past few days that
it will be business as usual. For a brief spell last week, it
appeared that Russia would go along with OPEC''s wishes to cut,
but then they said they would reduce a mere 30,000 bpd, a total
insult to OPEC''s leaders.

So as of late Wednesday, 11/14, OPEC has decided to play a
game of chicken. They have issued a conditional target of
reducing production a further 1.5 million barrels come January
1st, but only if non-OPEC nations decrease by a total of 500,000.
Gaining consensus on this last bit would appear to be a total
impossibility. And, all else being equal, were OPEC to lower its
production target to 21.7 million bpd, its market share would
plummet further to under 30%.

Meanwhile, another difficulty for OPEC is the fact that with the
global economy basically in recession, not only is demand
slackening, but inventories on all crude products are also rising
significantly, further weighing on prices. Most experts would
agree that stockpiles, particularly in North America, are currently
more than enough to meet the demands of winter.

The events of September 11 certainly didn''t help matters. U.S.
demand, for example, fell 6% in the days right after the attack,
with demand for jet fuel leading the way, off about 8%. Those
figures have come back some, but still nowhere near pre-9/11
levels.

OPEC does have an ally in the U.S., however, as it takes up
about 25% of daily world demand, with 60% of that being met
by imports. Our dependence on foreign oil has never been
higher and the U.S. has a real geopolitical stake in the price.
$25, OPEC''s target, is also considered to be a target of
Washington policy makers. The Bush administration doesn''t
want to see a price collapse, because that could easily lead to
chaos, particularly in Saudi Arabia, where tumbling government
revenues may sow the seeds of unrest across the kingdom.
Collapsing prices also hurt the huge U.S. oil industry, not a good
thing in an already slumping economy. [Of course the positive is
that plunging oil acts as a huge tax cut for the American
consumer.]

One relatively small step that the administration is doing to help
shore up prices is the announcement that the U.S. Strategic
Petroleum Reserve will be filled to capacity, 700 million barrels.
Currently, the reserve holds 545 mm, with another 48 mm on the
way through existing programs. Thus, the administration would
be calling for about 100,000 bpd over the next three years to
reach the 700 figure. Considering we currently use about 19 mm
bpd, 100,000 may seem like a drop in the bucket, but it could
nonetheless have a stabilizing impact on prices.

So this is the box that OPEC is in. Demand is slipping and the
cartel''s only price tool is to slash production (and then comply
with the targets), while hoping for a global economic pickup with
its commensurate increase in demand. But without non-OPEC
cooperation, it would appear we could be heading for a price
war, as OPEC has vowed they won''t risk losing any further
market share.

Of course as the war on terrorism shifts to other targets,
including Iraq, the possibility of supply disruptions and once
again soaring prices cannot be ignored either. Thus, there is
every reason to believe that severe volatility will continue to
be the order of the day.

Brian Trumbore

**Hott Spotts will return on November 29, when we will launch an
extensive study on the life and times of Ataturk.


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-11/15/2001-      
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Hot Spots

11/15/2001

OPEC Update

*Hott Spotts returns 11/29

From time to time it is necessary to update the energy situation
and OPEC''s efforts to control the price of a barrel of crude. As
of this writing, OPEC''s latest attempts are failing miserably.

As the price of crude drops to the lowest levels in over two years,
OPEC is desperately attempting to maintain its market share,
which has been slipping from about 40% to its current 30%. But
as the price of West Texas (or Light Sweet) crude tumbles below
$20, and with Brent North Sea now under $19, one can see how
difficult OPEC''s effort to get its ''basket'' of crude up to the $25
price target will be, especially given the global economic malaise
as well as the independence being exhibited by non-OPEC giants
Russia, Norway and Mexico.

At the start of 2001, OPEC (ex-Iraq) was producing 26.7 million
barrels per day (bpd), with worldwide demand hovering around
75.6 mm, meaning OPEC was responsible for 35% of global
production. But as the price slid due primarily to slowing
demand, OPEC opted to cut production three times to the 23.2
mm level. Only one problem, non-OPEC refused to cut as well,
so OPEC''s market share has slipped to 30%. [Again, ex-Iraq.]

Global demand was initially slated to rise to 77 million bpd in
2001, but the latest estimate is for basically flat demand at 75.7
mm. And the outlook for 2002 is not looking any better.

For its part OPEC also shoots itself in the foot when it
establishes production targets and then cheats on them, which
has been the case throughout this year. What held the cartel in
good stead for 1999 and 2000 was the membership''s discipline
in holding to production goals, but in 2001, nations like Iran
have gone back to those days when targets were largely ignored.

Meanwhile, non-OPEC Russia, Norway and Mexico have been
pumping away, especially as the price held in the $22-$25 range.
It was simply too good a deal to pass up. Russia and Norway are
the #2 and #3 producers in the world, by most counts, and,
together with Mexico, all have affirmed in the past few days that
it will be business as usual. For a brief spell last week, it
appeared that Russia would go along with OPEC''s wishes to cut,
but then they said they would reduce a mere 30,000 bpd, a total
insult to OPEC''s leaders.

So as of late Wednesday, 11/14, OPEC has decided to play a
game of chicken. They have issued a conditional target of
reducing production a further 1.5 million barrels come January
1st, but only if non-OPEC nations decrease by a total of 500,000.
Gaining consensus on this last bit would appear to be a total
impossibility. And, all else being equal, were OPEC to lower its
production target to 21.7 million bpd, its market share would
plummet further to under 30%.

Meanwhile, another difficulty for OPEC is the fact that with the
global economy basically in recession, not only is demand
slackening, but inventories on all crude products are also rising
significantly, further weighing on prices. Most experts would
agree that stockpiles, particularly in North America, are currently
more than enough to meet the demands of winter.

The events of September 11 certainly didn''t help matters. U.S.
demand, for example, fell 6% in the days right after the attack,
with demand for jet fuel leading the way, off about 8%. Those
figures have come back some, but still nowhere near pre-9/11
levels.

OPEC does have an ally in the U.S., however, as it takes up
about 25% of daily world demand, with 60% of that being met
by imports. Our dependence on foreign oil has never been
higher and the U.S. has a real geopolitical stake in the price.
$25, OPEC''s target, is also considered to be a target of
Washington policy makers. The Bush administration doesn''t
want to see a price collapse, because that could easily lead to
chaos, particularly in Saudi Arabia, where tumbling government
revenues may sow the seeds of unrest across the kingdom.
Collapsing prices also hurt the huge U.S. oil industry, not a good
thing in an already slumping economy. [Of course the positive is
that plunging oil acts as a huge tax cut for the American
consumer.]

One relatively small step that the administration is doing to help
shore up prices is the announcement that the U.S. Strategic
Petroleum Reserve will be filled to capacity, 700 million barrels.
Currently, the reserve holds 545 mm, with another 48 mm on the
way through existing programs. Thus, the administration would
be calling for about 100,000 bpd over the next three years to
reach the 700 figure. Considering we currently use about 19 mm
bpd, 100,000 may seem like a drop in the bucket, but it could
nonetheless have a stabilizing impact on prices.

So this is the box that OPEC is in. Demand is slipping and the
cartel''s only price tool is to slash production (and then comply
with the targets), while hoping for a global economic pickup with
its commensurate increase in demand. But without non-OPEC
cooperation, it would appear we could be heading for a price
war, as OPEC has vowed they won''t risk losing any further
market share.

Of course as the war on terrorism shifts to other targets,
including Iraq, the possibility of supply disruptions and once
again soaring prices cannot be ignored either. Thus, there is
every reason to believe that severe volatility will continue to
be the order of the day.

Brian Trumbore

**Hott Spotts will return on November 29, when we will launch an
extensive study on the life and times of Ataturk.