Is OPEC Set To Pump Again?

Mar 13, 2007 (From the Wall Street Journal via Dow Jones Newswires)

OPEC's campaign to boost oil prices by constraining supply has worked. As oil ministers meet this week, signs are mounting that the group will soon have to begin pumping more crude.

Ministers from the Organization of Petroleum Exporting Countries are scheduled to meet Thursday in Vienna to review oil-output levels. The cartel cut production at each of its last two meetings to reduce bloated inventories.

OPEC's ministers have made clear in public statements that they won't consider tightening supply further in Vienna this week, unless prices suddenly show signs of collapsing.

The omens, industry officials said, suggest OPEC will need to start increasing output in a few months to avoid choking the world economy.

OPEC members "have already reached their goal of wiping out a large part of excess inventories and stabilizing prices," said Vera de Ladoucette, director of Middle East Research at Cambridge Energy Research Associates in Paris.

A senior OPEC official said ministers will review the latest demand, supply and inventory data -- including a monthly oil market report due to be published today by the Paris-based International Energy Agency, the industrialized world's energy watchdog. "It looks like there will be no change" in output policy at this week's meeting, this official said. The official cautioned against ruling out a surprise decision, if fresh data suggest a need to cut.

Analysts reckon OPEC's ministers are likely to wait until oil-inventory data for the first few months of this year are published in coming months to confirm what the industry suspects -- that inventories are close to becoming so lean that the market is prone to a renewed price surge. OPEC members have relished the four-year boom in crude revenue, which has put hundreds of billions of extra dollars in their coffers, but they are anxious to avoid a recession-inducing price climb.

If they conclude a cut is in order, they have ways of ratcheting up supply quickly even before calling for a formal output increase. Saudi Arabia, OPEC's largest producer, has done most of the cutting, and could quietly start increasing shipments if buyers start asking for more oil, industry analysts said. Or OPEC might meet again in a few months to consider formally doing away with some or all of the 1.7 million barrels in cuts announced since October. Analysts generally estimate that OPEC actually has taken one million barrels a day or so of supply off the market.

After falling briefly to slightly less than $50 a barrel in New York in January, oil prices have bounced back to about $60 a barrel. Oil futures fell $1.14, or 1.9%, to $58.91 yesterday on the New York Mercantile Exchange.

This has contributed to a rise in U.S. retail gasoline prices, which this week stood at an average of about $2.56a gallon, up 32 cents from a month earlier, according to the Energy Information Administration.

Oil prices peaked nominally at $77.03 a barrel in New York in July, though adjusted for inflation they were considerably higher in the early 1980s. Worries about potential supply disruptions -- because of hurricanes, the nuclear standoff with Iran, or political violence in the oil regions of Nigeria -- drove the market last year.

Prices began falling as the threat of supply outages faded. As OPEC started tightening its spigots in the fall, it also began building up unused pumping capacity that could be used to offset supply outages, further easing supply concerns.

Since OPEC's cuts, inventories in consumer hands have been falling fast. Last month, the IEA reported that commercial stockpiles in its 26 member countries in North America, Europe and Asia fell by 93 million barrels in the fourth quarter, to 2.674 billion barrels at the end of December.

That was just seven million barrels shy of OPEC's target of reducing the inventory overhang by some 100 million barrels. Last week, data from the U.S. Energy Department showed that inventories in the U.S. alone had fallen by more than 100 million barrels since the start of October.

Leo Drollas, deputy director of London's Centre for Global Energy Studies, estimates that global inventories will have fallen nearly 160 million barrels in the six months through the end of March. "We haven't seen a stock draw of this magnitude in several years," he said.

Meanwhile, "the big surprise this year could be [strong] demand for oil," said Yasser Elguindi, senior managing director at Medley Global Advisors, a financial-markets consultancy. He estimates that the world might need as much as 1.8 million barrels a day more oil than a year ago. That is more than the 1.55 million barrel-a-day growth in world demand, to 86 million barrels a day, being projected by the IEA.

"If OPEC is true to its word, it has to turn from production cuts to production hikes," Mr. Elguindi said, noting the oil exporters' success in whittling down inventories.

OPEC's ministers, including Saudi Arabia's influential Ali Naimi, have repeatedly said they aren't targeting a particular price level. Prices, they assert, lately have been influenced by financial-market investors, geopolitics and fears of supply disruptions. Last week, Exxon Mobil Corp. Chief Executive Rex Tillerson said in an interview that concerns about the reliability of petroleum supply had resulted in a price premium. "That premium seems to be in the $15 to $20 range," Mr. Tillerson said.

Oil analysts at Barclays Capital see the price of a barrel of oil moving up toward $65 a barrel. Among the factors cited by Barclays Capital in a commentary was the 1.4% growth in petroleum demand in the U.S. in February, when compared with a year earlier. That, said Barclays, was the largest increase seen in any month for more than 10 years.

At the same time, many analysts are lowering expectations of growth in oil supply coming from countries that don't belong to OPEC, suggesting the oil exporters' group may have to make up the shortfall. "There is a danger that they tighten oil markets too much," said Mr. Drollas.

Copyright (c) 2007 Dow Jones & Company, Inc.

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