Despite Demand Concerns OPEC Set to Keep Crude Taps Open

Dow Jones Newswires

LONDON Sep 8, 2006 (Dow Jones Newswires)

Ministers from the Organization of Petroleum Exporting Countries gathering Monday in Vienna will face a familiar challenge: whether to put the brakes on oil production at a time when high crude prices have fueled concerns about slowing global economic growth.

Their decision is likely to have a familiar ring also: to keep their official pump-at-will policy unchanged.

Benchmark oil prices have slipped $11 a barrel from record high prices in July. But a move by OPEC to trim output would give a leg-up to oil prices at a time when crude still hovers around a pricey $67 on production outages in Alaska, Iraq, and Nigeria, simmering concern over the outcome of Iran's standoff with Western nations on its nuclear program, and relatively healthy global economic growth.

OPEC production, excluding Iraq which isn't part of the group's output quota system, has also slipped 2.7% since December, according to OPEC data. This has lessened the need for an official cut by OPEC, whose production meets about 40% of world oil demand.

The output slippage has come from some factors outside of the group's control. The world's biggest oil exporter Saudi Arabia, has cut production in recent months to the lowest level in two years due to what it says is a lack of buyers.

But OPEC has more reason to be concerned about the strength of global economic growth and oil demand than when ministers last met in Caracas in June. Clearer signs have emerged in the past few months that economic activity is easing in the U.S., the world's largest energy consumer, as the property market slows and high energy costs lighten consumer wallets.

China, the world's second biggest energy market, has moved recently to tame demand and inflation by raising borrowing costs and the value of its currency.

"They (OPEC) have some things to think about," said Leo Drollas, deputy director of the Centre for Global Energy Studies in London. "(Economic) growth is slowing, as we've seen in the United States."

The end of the traditional peak summer driving season in the U.S., Europe and Asia is also putting a brake on energy demand, and U.S. oil inventories are comfortably above levels seen at this time last year.

Benchmark futures prices on the New York Mercantile Exchange have fallen over 10% in the past four weeks, weighed down by these demand indicators as well as renewed calm in the Middle East.

The price drop has slowed, for now, a phenomenal run that has generated giant windfalls for OPEC countries as crude prices skyrocketed amid soaring global demand and political upheaval and supply disruptions in some important oil producers.

Prudhoe Bay Risk

But far from OPEC facing a deteriorating environment, energy analyst Antoine Halff of Fimat USA said the recent dip in oil prices and a lower but-still-healthy plateau in economic growth - if this scenario plays out - will help stabilize oil demand, not harm it, as lower prices encourage consumption.

With about seven weeks left in the U.S. hurricane season, global oil markets may still demand more OPEC oil if hurricanes were to shut output in the U.S. Gulf of Mexico. The supply disruption from the partial shutdown of the 400,000 barrel-per-day Prudhoe Bay oil field in Alaska also continues to hang as a risk over oil prices.

BP PLC (BP), the operator of the field, shocked global oil markets on Aug. 6 when it said it was shutting it down after finding severe corrosion in a pipeline. It has since reopened half of the field.

The U.S. Department of Energy's chief oil analyst, John Cook, expects crude prices - led by a gain in distillates, which include heating oil and diesel - to move higher as winter approaches. A cold winter, combined with strong diesel demand from Asia and Europe, would boost heating oil and crude prices.

"Prices in the high sixties are not likely to last long because of the potential of a distillate-led recovery," said Cook, director of the petroleum division at the department's research and statistics arm.

For its part, OPEC production levels may get a finer examination at the meeting than in past months. Output from Saudi Arabia, which holds nearly all of the group's spare production capacity, was down almost 3%, or 270,000 barrels a day, in July from December at 9.16 million barrels a day, according to OPEC's most recent oil report in August.

A senior OPEC delegate said in an interview this week that Saudi Arabia's output in August was 9.1 million barrels a day, at the kingdom's allocation under OPEC's production quota system totaling 28 million barrels a day.

Because of this and the drop in oil revenues this implies, some analysts think the kingdom may be reluctant to trim output much below its quota without demanding cuts from the five other OPEC members, like the United Arab Emirates, which have recently been pumping above their quotas.

"I think the closer the Saudis get to their quota and below that the less willing they'll be to go on cutting," said one oil analyst, who declined to be named.

Saudi Oil Minister Ali Naimi, the de facto leader of OPEC, told The Wall Street Journal in June the kingdom reined in output due to a lack of buyers. The kingdom would step in and fill any supply shortfall, if one occurred, but would not sell its oil at a discount, Naimi said.

Iran Still Wants Secretary General Slot

Output from OPEC's 10 quota-bearing members, excluding Iraq, was down 2.7%, or 760,000 barrels a day, in July at 27.48 million barrels a day from December, according to OPEC. War-torn Iraq hasn't been part of OPEC's quota system since 1998.

Militants seeking more control of oil resources in OPEC member Nigeria have launched several attacks on oil infrastructure this year. Nigerian output, which has been partially offset by the start of new offshore fields, was down 300,000 barrels a day in July from December, according to OPEC.

Iran, OPEC's second biggest producer, has also said the past week it will push its belief at the Vienna meeting that the OPEC secretary general position is the Islamic Republic' "right."

OPEC has denied Iran the position, a symbolic slot with negligible powers, since the country's Islamic Revolution in 1979.

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