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OPEC's Darkest Days May Have Just Begun
by Joe Duarte
November 3, 2003

Even as the Bush energy bill grinds its way through Congress, a new energy policy is being carried out, outside of Congress, and mostly outside of the United States.

In a piece in January called "OPEC's Last Hurrah," I detailed a plausible scenario in which the cartel would begin to diminish in its ability to control global oil prices, leading to the possible beginning of its end as a viable entity, and the emergence of Russia as the dominant player in world oil markets.

Since then, events within the cartel and the global political situation as a result of the war in Iraq, have moved us closer to a potential paradigm shift in the global oil markets, as Russia, with the help of the United States, begins its attempt to topple OPEC as the dominant force in the sector.

And the open war between the two titans for control of the oil markets may have seen its public unveiling and opening salvo on October 10, 2003.

On that day, OPEC President Abdullah al-Attiyah was quoted by Reuters saying that "The market will see oversupply in 2004 so OPEC and non-OPEC should sit together and should have a serious talk."

On the same day Russia's Energy Minister Igor Yusufov was quoted as saying that the oil cartel OPEC was wrong to keep oil prices as high as $28 per barrel and insisted that Moscow would continue to boost output.

In fact, Yusufov described the situation as a disagreement with OPEC and stated Russia's position as one in which "we believe that prices above $25 per barrel are hurting consumers, while they consider a price of $28 a normal one. Our strategy is to increase output volumes smoothly and preserve prices."

More important is the fact that Yusufov's comments came only a month after Russia signed an energy cooperation agreement with OPEC's leading producer Saudi Arabia.

Thus, the battle lines have been drawn; OPEC is trying to cut supply while Russia is increasing production capacity in order to grab at OPEC's market share.

What's the next step? I expect that the next few months will see a merger of convenience between the Russian oil industry and the United States.

A recent report in the Moscow Times.com quoted Yusufov as saying that a deal between Exxon Mobil (XOM) and Russia's Yukos Sibneft (YUKOF) would be a "positive step, and a source of "pride."

The repercussions from an Exxon deal, which, according to industry insiders, is progressing steadily, would be significant in many ways.

First, it would give the U.S. giant, a badly needed growth opportunity, while allowing it to diversify away from OPEC, and Saudi Arabia's problematic internal politics and event risk.

At the same time, the U.S. would also be able to move away from OPEC's black sheep, Venezuela, another political hot potato. Saudi Arabia is the number one provider of oil to the U.S., while Venezuela is number four.

Second, it would allow Exxon, to make more money from oil and gas sales to Europe, Russia's largest customer, making the U.S. strategically important to Europe, as an energy provider.

And third, and perhaps most significant, if the Exxon entry into Yukos is successful, it could easily open the door to other U.S. oil companies, setting the U.S. up, not as a leading oil consumer, but a leading oil producer. In such a situation the U.S. would in fact count both Europe and China as customers, again putting major political cards up American sleeves, given the foreign energy dependence of both the Chinese and the Europeans.

So while Russia and the U.S. look to be setting up to rule the global oil markets, OPEC continues to do everything wrong by cutting production and continuing to foster political instability in its member countries.

In effect, to use a boxing analogy, Russia is setting itself up as the potential undisputed oil and energy market heavyweight champion of the world, with the U.S. becoming its agent and manager. In contrast OPEC is up against the ropes and facing a stumbling eight count.

The bottom line? Another nail has been driven in OPEC's coffin. And the U.S. energy policy? Well, it's not as adrift as the major media would have us believe.

© 2003 Dr. Joe Duarte
Originally posted October 20, 2003 at www.joe-duarte.com and cbsmarketwatch.com.
Dr. Duarte's Bio and Archive

Joe Duarte, M.D.

Joe Duarte M.D. is founder and Editor in Chief of Joe-Duarte.com. Dr. Duarte is a board certified anesthesiologist, a registered investment advisor, and President of River Willow Capital Management, where he manages individual client accounts. His latest books "Successful Energy Sector Investing" and "Successful Biotech Investing" (Prima/Random House) are available on line at amazon.com, barnesandnoble.com, borders.com, Traders Press, and all major online and brick and mortar bookstores in the U.S., U.K. Europe, and Australia. Dr. Joe Duarte’s Daily Market I.Q. is a subscriber service that provides daily intelligence, trading strategies, and technical analysis at www.joe-duarte.com.