NEW YORK (Dow Jones Newswires), Feb. 17, 2009
Crude oil prices have plunged to near five-year lows, fueling speculation that OPEC may again slash production levels when it meets in a month.
Saudi Arabia, OPEC's kingpin and the world's biggest oil exporter, already has cut output by up to 2 million barrels a day from a 25-year high hit last summer when crude prices were soaring to near $150 a barrel.
But despite the Saudi-led cut backs, global inventories have swelled as the oil demand is shrinking worldwide, battered by the deepening economic crisis.
OPEC frets that the growing glut is "likely to continue to disrupt the overall stability of the market," with the impact deepening as demand drops seasonally in the second quarter and refiners slow operations.
As OPEC ponders its next move at its March 15 meeting, analysts said the scope for further output cuts by the Saudis -- who boast the world's largest oil reserves and lowest production costs -- may be limited by domestic energy needs for natural gas to cool the desert kingdom as spring approaches. The gas is produced in association with crude oil, and data from the Saudi Electricity Co. show household demand for gas can be as much as 16 times higher in summer months than in winter.
The Organization of Petroleum Exporting Countries faces a vexing problem in its effort to rebalance the market: If the Saudis can't make needed, deeper output cuts, who will?
"There have been suggestions that (Saudi) output could be choked back further to around 7.7 million barrels a day in February, depending on prevailing price levels," the International Energy Agency said in its Feb. 11 monthly oil market report.
"However, the kingdom may be unwilling to push output beneath a 7.5 million barrels a day to 8 million barrels a day range for long if this were to risk undermining domestic associated gas supply," the IEA said.
"Any cut below quota (by the Saudis) is a reflection that there is no demand," said Lawrence Eagles, head of commodity research at JPMorgan Chase.
Still, the question of near-term Saudi supply holds the key to the upcoming talks. Pressure will mount on the Saudis to shoulder the burden of any further cuts, as it has in the past.
"There was a commonly held view once that the Saudis would have difficulty going under 8 million barrels a day crude because of the associated gas," said Adam Sieminski, economist at Deutsche Bank. "In our view in 2009, with sinking demand for many of the chemical and industrial productions that the gas is being used for, the Saudis might have more flexibility than many believe."
OPEC said Friday that January output for the 11 members with quotas (excluding Iraq) fell 965,000 barrels a day from December, to 26.33 million barrels a day. That level is still about 1.5 million barrels a day above the output ceiling adopted from Jan. 1.
Sieminski said OPEC will need to cut output further, as he sees oil demand falling by 1.5 million barrels a day this year, far more than most forecasts.
Naimi said the "exaggerated price weakness" in the near 80% drop from record highs last summer will prove to be "just as unsustainable" as were the "stratospherically high levels experienced last year."
OPEC still holds out hope of a modest recovery in oil demand by year end. OPEC sees fourth-quarter demand rising by a slim 100,000 barrels a day from a year earlier.
Algerian Oil Minister Chakib Khelil said in Washington this week that he saw even chances that OPEC would cut output again next month. But OPEC Secretary General Abdalla El-Badri said in recent days that further cuts would only be considered when OPEC shows full compliance with earlier pledges.
Copyright (c) 2009 Dow Jones & Company, Inc.
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