Oil Prices Stem Recent Slide, Price War Looms

LONDON – Oil prices corrected higher on Friday after plunging around $4 a barrel to fresh two year lows this week as OPEC raised the stakes in a looming tussle with Russia and other rival producers.

Brent crude futures were up 40 cents at $17.73 a barrel in late afternoon trading compared to a closing price of $21.38 last Friday and a peak of $31.05 on Sept. 11 when hijacked planes attacked the United States.

OPEC fired the first shots of a possible price war when it decided on Wednesday not to cut output unilaterally to rescue flagging prices unless independent producers reciprocated.

"OPEC has thrown down the gauntlet and the issue now is whether Russia will swiftly curb production," said Lawrence Eagles on GNI Research.

If Russia does not respond quickly OPEC will have entered a price war "whether it likes it or not," he added.

But on Friday Russian Prime Minister Mikhail Kasyanov visiting Madrid appeared in no mood to compromise.

"No one can make any demands of us," the Russian RIA news agency quoted him as saying about OPEC's request for cuts.

However, there were signs on Friday that other oil producers might try again to persuade Moscow to trim output.

Mexican Energy Minister Ernesto Martens is expected to travel to Moscow on Monday to hold talks with Russian officials on oil output cuts, a Russian diplomatic source said on Friday.

Mexico and tiny Oman are so far the only non-OPEC members to offer substantial oil export cuts to help support world prices.

Also, Venezuela Energy and Mines Minister Alvaro Silva said Friday he will visit Russia in December to lobby the world's No. 2 producer to join OPEC cuts to strengthen flagging oil prices.

Market confidence this week was initially knocked by the New York plane crash on Monday and reports showing a comfortable cushion of winter fuels across the globe.

But prices took another tumble mid-week as the OPEC cartel meeting in Vienna said it would only make fresh production cuts if major non-cartel producers such as Russia, Mexico and Norway joined the effort to revive the sinking market.

Mexico has offered to cut by 100,000 bpd but OPEC has pinpointed Russia, the world's second biggest exporter after Saudi Arabia, as key to any agreement.

With more than one month before OPEC's January 1 deadline for a cut, the deadlock has left oil traders scratching their heads for near-term direction.

"In one of the greatest showdowns, neither Russia nor OPEC have blinked as they face each other down over the issue of coordinated production cuts," said Simon Games-Thomas at NM Rothschild & Sons in Sydney.

"I think I will let the crystal ball gather a little dust for a few days."

The Organisation of the Petroleum Exporting Countries has delayed implementing output curbs of 1.5 million barrels per day until 2002 pending a new round of talks with non-OPEC exporters.

OPEC wants 500,000 bpd of non-OPEC supplies off the market to bring total cuts to two million bpd from January 1, a volume it reckons is necessary to lift prices back above $20 a barrel.

RUSSIA A TOUGH NUT

Traders fear the standoff might trigger a price war, although OPEC denies this, saying it is making an appeal to non-OPEC to help stabilise the market.

The 11-member cartel has reduced output three times so far this year, slicing 3.5 million bpd off its production ceiling to keep prices buoyant as petroleum demand has waned because of the global economic slowdown and stocks have run into surplus.

Now, it says, other producers should help shoulder the burden, especially as non-OPEC supplies have been on the rise.

Mexico said on Thursday it would make its 100,000 bpd cut if OPEC and other producers also implement supply restraints.

Norway, the third biggest exporter after Saudi Arabia and Russia, appeared to ease its initial stance, saying on Thursday that it was willing to trim output to prevent a price collapse.

Oslo said it would make an evaluation of the market and come to a possible decision next week.

The toughest nut to crack appeared to be Russia, which had offered a token 30,000 bpd reduction out of a daily output of seven million barrels despite a lobbying visit by Saudi Oil Minister Ali al-Naimi.

Naimi called Russia's position "extremely unreasonable."

Kasyanov said he was unworried about the current weakness of the oil price.

"These are market fluctuations, which have happened and will happen constantly and a calm attitude is needed," he was quoted as adding. He said a period of waiting was needed to make a proper judgement of what was happening on the market.

Russia, Norway and Mexico announced output curbs in concert with OPEC during the 1998/1999 price crash when oil briefly fell below $10 a barrel. But Mexico was the only one of the three to make a substantial reduction in production.

Kuwait warned on Thursday that oil could once again fall into single digits if non-OPEC producers refused to cooperate with restraints.

"I wouldn't be surprised. Reaching $10 will be a hard hit for us all and even harder for those with higher cost of production," Kuwaiti Oil Minister Adel al-Subaih told reporters in Vienna.

"There will be hard times to come in the form of low prices," he said.