---------------------- Forwarded by Larry May/Corp/Enron on 09/11/2000 08:33 
AM ---------------------------


"PIRAOPEC" <listserv@pira.com>@mrpc.com on 09/10/2000 07:07:06 PM
Sent by: Maiser@mrpc.com
To: "PIRAOPEC" <listserv@pira.com>
cc:  

Subject: OPEC LOG


OPEC LOG: SUNDAY, SEPTEMBER 10TH

THE AGREEMENT

OPEC will complete deliberations on Monday but for all practical purposes
the deal is done. They have agreed to raise allocations by 800 MB/D on a
prorata basis beginning October 1st. The increase is until the next meeting
which will be November 12th in Vienna. This rather early data was chosen
because of the already scheduled Producer/Consumer Dialogue in Saudi Arabia
November 17-19 and the beginning of Ramadan religious observance beginning
November 27th and lasting for approximately one month. The price band and
OPEC output response mechanism (20 consecutive business days above $28/BBL
basket price, increase output 500 MB/D, 10 consecutive days below $22/BBL
basket, decrease 500 MB/D) will remain in effect with obviously a clean
slate to start the price tracking process.

Saudi Arabia pretty much got its way at the meeting, asking for a 1 MMB/D
increase and compromising on 800 MB/D. Of course the increase is prorata
which implies an increase in the Saudi allocation of 260 MB/D, bringing its
total allocation to about 8.5 MMB/D. Saudi crude output is estimated to have
been almost 8.8 MMB/D in August(including 140 MB/D Abu Safa output produced
on behalf of Bahrain). PIRA expects Saudi Arabia's crude output increase to
be on top of its current over-production bringing total output to nearly 9.1
MMB/D. Since with the exception of Saudi Arabia and the UAE, all the OPEC
members are essentially at capacity, the 800 MB/D OPEC allocation increase
should translate into a production increase of only around 400 MB/D. Saudi
Arabia and the UAE have allocations equal to 41.2% of the OPEC total(now
26.2 MMB/D excluding Iraq).  With August/September OPEC crude output at
around 29 MMB/D, fourth quarter crude output will be around 29.5 MMB/D
assuming Iraq at 3.0 MMB/D.

MARKET BACKGROUND

Commercial oil inventories remain quite low with the three major OECD
markets--U.S., Europe and Japan-- ending August with the lowest level in
over 10 years. PIRA would not be surprised to see inventories revised up
somewhat for Europe for the end of the second quarter, but this will not
materially change the likely end August position.

In addition to low inventories, the world is operating with very little
spare producing capacity. With OPEC crude output at 29.5 MMB/D in the fourth
quarter, there will only be some 0.5 to 1.0 MMB/D of instant spare producing
capacity remaining. This number will certainly increase in time, but for at
least the first half of the fourth quarter there is not much room for any
interruption in expected supply for any reason (hurricanes, Iraq saber
rattling, earthquakes, etc).

Also, the lead seasonal product distillate(gasoil/diesel) is in great shape
and with substantial refining margins there is plenty of headroom for crude.
Add to the mix very low PADD II crude stocks, positive technicals and
seasonals, at most only ten million barrels of current net speculative
length in the NYMEX crude contract and continued strong economic growth and
you have rather impressive positives for price.

SHORT TERM MARKET BALANCES & PRICES

With fourth quarter OPEC crude output at 29.5 MMB/D, world onshore oil
inventories should draw only 100-200 MB/D in the quarter. Thus assuming
normal early winter weather, stocks will remain very low but not, on
average, decline significantly. For the three major OECD markets, commercial
inventories should end the year 1-2% above the year earlier.

In these circumstances and given the very positive market factors noted
above, it is hard to see oil prices taking a big hit downward as a result of
the OPEC agreement. PIRA would expect the very initial market reaction to be
negative given that the agreed increase is somewhat more than anticipated.
The market will then probably consolidate given that there is a good deal of
confusion about the impact of the agreement. Given the current very strong
fundamentals an upward price bias is likely to quickly return. However, one
major wildcard negative for price first needs to be sorted out.

THE POTENTIAL U.S. SPR SWAP

If the United States is going to use the SPR to swap current barrels from
the strategic reserve to be replaced in the future, the market will find out
this week. With the U.S. Presidential election on November 7th, October
pipeline scheduling completion on September 25th and probably ten days to
carry out an auction, this is the last window of opportunity to have a
meaningful impact before the onset of winter and the election. With SPR
barrels being short haul, as opposed to 45 days away for any incremental
OPEC oil, its impact on oil prices would be far greater than OPEC's current
agreement. Moreover, if the decision is made to use the reserve in this
fashion, the Secretary of Energy is likely to decide to make sure it has the
desired impact of bringing prices down substantially by offering to swap
very substantial volumes. PIRA rates the odds of a swap at 55%.