OPEC remains very concerned about a price crash in the second quarter, which for seasonal reasons is usually the weakest period of the year for oil demand. Some ministers have already said output will need to be cut early next year to balance the market.
"Some proactive action needs to be taken, whether at this meeting or at the meeting before the March meeting," Saudi Arabian Oil Minister Ali Naimi said Wednesday. "All these options are available to us."
Thursday, Kuwaiti Oil Minister Sheikh Ahmad Fahad Al-Ahmad Al-Sabah said the group may need to cut more than 750,000 barrels a day off its 24.5 million barrel a day output ceiling in the first quarter to make room for rising output from Iraq. OPEC's Ministerial Monitoring Committee, which advises the full group on production policy, has warned of a supply overhang in the second quarter and said the group will need to cut its output ceiling by one million barrels a day even if Iraq's output holds steady, a person familiar with the MMC's deliberations said.
Iraq produced two million barrels a day of oil in November, Oil Minister Ibrahim Bahr al-Uloum said Thursday. The country has managed to boost its oil output to about 70% of prewar levels after struggling all summer, but persistent sabotage of a key export pipeline has kept Iraq from ramping up its large northern fields to full capacity.
Oil Prices Fall
Oil prices fell on the news OPEC had settled on keeping output unchanged. January light, sweet crude futures were down 43 cents on the New York Mercantile Exchange to $30.67 a barrel. January Brent blend futures was down 44 cents on London's International Petroleum Exchange to $28.70 a barrel.
The drop was expected, as the well-financed speculators, such as hedge funds, that drive movements in oil futures and were badly burnt by OPEC's surprise decision in September to cut output, had placed heavy bets on rising prices -- positions that would have to be unwound to some degree if another surprise didn't materialize.
"I suspect we're going down from here," said Bill O'Grady, an analyst with A.G. Edwards. Prices had risen ahead of the meeting on reports the group would move to further cut its output ceiling.
The group's challenge now is to improve compliance with quotas that went into effect Nov. 1, said Gary Ross of PIRA Energy. The group estimates its members are exceeding those levels by about one million barrels a day.
Oil prices are still at levels high enough to trouble energy officials in consuming nations, but OPEC ministers made clear this weak that they are prepared to tolerate or support prices at levels higher than those they targeted previously because of the falling value of the dollar.
Under a price-band mechanism in place since 2000, OPEC has aimed to keep its reference oil price near the $25 midpoint of a $22 to $28 target range and has an informal agreement to adjust output if prices stray for long beyond the band's upper or lower limits.
But Wednesday, Mr. Naimi, along with Libyan OPEC representative Abdulhafid Mahmoud Zlitni and OPEC President Abdullah bin Hamad Al Attiyah, made clear the group has grown less concerned about prices topping the high end of the band. "The weakened dollar is also a matter of concern, as consumers are enjoying a huge discount," Mr. Al Attiyah said. "Even $28 a barrel right now is not the same as $28 a barrel last year."
Mr. Naimi said the group is aiming to support the price of oil at levels that equate with the "purchasing power of the old, good dollar."
"The current prices are right," the minister said. "The dollar is weakening, you know it's purchasing power is quite weak, so the price is OK."
More Aggressive Approach
While the Saudi minister has cautioned against reading too much into his comments, they appear to reflect a shift in approach by the group, which in theory at least has allowed price movements to steer its actions through the price-band mechanism.
In reality, the group hasn't followed the band mechanistically. But Mr. Naimi's comments and the September surprise make clear the group intends to preempt price moves rather than react to them. And the ministers' lack of concern about current prices shows a willingness to support prices at a higher level, analysts said.
"That range is the official price," said Manouchehr Takin, upstream oil analyst at the London-based Center for Global Energy Studies. "In fact, they are really aiming at upper half, around $28."
Defending prices at such levels could be tricky. OPEC, which effectively acts as the world's swing producer by covering oil demand not met after other producers pump what they can, may need to make steep cuts early next year to offset increases in output from Iraq and independent producers such as Russia.
The International Energy Agency, the energy watchdog for the Organization for Economic Cooperation and Development, expects demand for OPEC oil to fall by 2.8 million barrels a day, or 11%, in the second quarter. That drop is troublesome for the group, which is already having to juggle some members' requests for higher individual quotas to reflect increasing production capacity.
After September, however, oil traders are more reluctant to bet against the group. Many probably will hold on to their long positions if OPEC continues to meet frequently to tinker with output, said Ed Silliere, a trader for Energy Merchant Corp., a New York supplier of energy products to independent marketers.
"They're going to micromanage this market," he said. "They have been, and they're going to continue to do so."
OPEC also plans to meet March 31 in Vienna and June 10 in Beirut.
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