Some in OPEC Aim to Stand Pat Despite High Stocks

ABUJA, Nigeria(Dow Jones)

OPEC ministers gathering this week for their last meeting of the year will face a tantalizing question: whether to take more oil off global markets now in a bid to buoy prices or review the situation in the new year and risk prices falling further.

Ministers from the cartel arriving in the Nigerian capital thus far seem to be leaning towards the latter.

The challenge caps a volatile year in oil markets, that saw prices peak at $78.40 a barrel in July before tumbling toward $55 a barrel by mid-November as political risk concerns faded and global oil stocks continued to brim. The slide in prices ultimately prompted the Organization of Petroleum Exporting Countries to agree in October to cut crude output by 1.2 million barrels a day, or more than 4%.

While there's still considerable disagreement as to how much of that cut has been actually implemented - Saudi Arabia is shouldering the largest burden - some within the oil cartel are pushing for another reduction in output in a further bid to hold oil prices around $60 a barrel.

"In view of the supply of oil being considerably above demand, we will try to have a reduction in production," said Iran's Oil Minister Kazem Vaziri Hamaneh before leaving Tehran for Abuja, the Nigerian capital.

Venezuela - and up until now Nigeria - has backed a cut of at least that order of magnitude. But several ministers in Abuja - including those from the Gulf states - declined to back a cut, with prices trading above $60 a barrel. Nigeria's oil minister Edmund Daukoru, who has been a strong advocate of another production appeared to back away from the prospect late Tuesday, while the head of Libya's oil industry Choker Ghanem also said he doesn't think a cut is merited.

United Arab Emirates' Oil Minister Mohammed al-Hamli said that there would be no crude production cut by OPEC unless "absolutely necessary", adding that current oil prices around $60 a barrel are reasonable, a view echoed by Kuwait's Oil Minister Sheikh Ali Al Jarrah Al Sabah.

Qatari oil minister Abdullah bin Hamad Al Attiyah said if OPEC were to cut again, it would be from the group's informal production ceiling of 26.3 million barrels a day, though he didn't say whether he favored a cut. OPEC agreed in October to take 1.2 million barrels a day off global markets, paring production from about 27.5 million barrels a day of actual output, versus its long-ignored output ceiling of 28 million barrels a day.

Saudi Voice Key

There are still questions as to whether the loudest voice in the group - OPEC kingpin Saudi Arabia - will favor another reduction when there's evidence some in OPEC haven't yet fully implemented cuts agreed at the group's last meeting in Qatar on Oct 19.

Saudi oil minister Ali Naimi, in a clear warning to other OPEC members of the need for them to deliver the promised cuts, said last month: "The kingdom is not under any circumstances ready to be the only one stabilizing the market through what is called being a swing producer, whereby the kingdom is alone it cutting its production to maintain prices, while others don't do anything."

Saudi-owned Al Hayat newspaper quoted OPEC sources as saying the group would keep its oil production unchanged and review the state of oil markets again at a special meeting at the end of January, echoing an article last week by the Wall Street Journal. Naimi is due to arrive in Abuja on Wednesday.

A major influencing factor at the OPEC decision-making table Thursday will be the level of oil inventories in the U.S. and other large consuming nations. Combined crude oil and petroleum products held by U.S. oil companies fell by a record 878,000 barrels a day, or 53.5 million barrels since the end of September, to 1.045 billion barrels at the end of November, preliminary data from the Energy Information Administration show.

Because of lower than expected refinery operations, crude oil inventories stand at a 12-year high for this time of year and are 14% - or nearly three days refinery throughput - above the five-year average, at near 340 million barrels.

With a potential slowdown in demand on the horizon during the anticipated refinery maintenance season in the U.S., the supply overhang will continue to preoccupy ministers keen on holding oil prices around current levels.

"OPEC has been known to make some tough decisions and cut production when prices were high," said Yasser Elguindi, energy analyst at Medley Global Advisers. He cited as examples OPEC meetings in Cairo and Algiers in recent years in which the group announced output reductions.

Complicating the outlook is a sense that another modest cut from OPEC will do little to alter this dynamic. There is concern that "even a deep cut will not be enough to soak up excess global oil supplies," said Mike Fitzpatrick, vice president for risk management at Fimat USA in New York.

U.S. light, sweet crude futures in New York traded down 30 cents at $60.92 a barrel after trading as high as $62.01 a barrel. Traders attributed some of the fall to lower expectations that OPEC will agree to cut more crude supply.

Angola Likely To Join

The Abuja meeting will mark the second time the powerful oil group has met in Nigeria, a key producer of high-quality, light, sweet crude oil. The country's oil minister Edmund Daukoru, who has chaired the group for the past year, will hand over the revolving OPEC presidency to United Arab Emirates' Oil Minister Mohammed al-Hamli.

The meeting's venue will also have a rich symbolism for Africa's growing role as an energy source: OPEC is set to discuss the bid by Angola - one of the world's fastest-growing producers - to join the group and could see the nation participating fully in Thursday's meeting.

According to OPEC's Statute, any net exporter of crude oil "which has fundamentally similar interests" can apply to be accepted by the group. Three-quarters of the membership must approve an application, including all founding members - Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

At around 1.4 million barrels a day, Angola would slot in ahead of Algeria, Indonesia and Qatar in the OPEC rankings of top oil producers.

OPEC's acting Secretary General Mohammed Barkindo said he doesn't expect any objections to Angola's membership bid. Al-Attiyah, the Qatari minister who had just returned from a trip to Angola, said he favors the country's application.

Copyright (c) 2006 Dow Jones & Company, Inc.


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