With Eye on US Econ Woes, OPEC Likely to Hold Output Steady

Despite calls by the Bush administration and European governments for OPEC to pump more oil, the cartel may actually look to cut output this spring if signs continue to point to increasing oil supplies and diminishing demand.

Such a move could worsen global economic conditions if U.S. financial woes deepen, but OPEC's quandary over whether to lift or lower its production highlights what a tough year this could be for the 13-member organization. As it prepares to meet this Friday in Vienna, the Organization of Petroleum Exporting Countries faces its murkiest economic outlook in years.

A sharp economic downturn in the U.S. could seriously dampen global demand growth. But the thirst for oil is still intense in China and the Middle East, and could pick up at any time in the developed world.

On the supply side, a bevy of previously delayed oil projects are now expected to start delivering the goods. But it's unclear whether output from non-OPEC suppliers in Africa and Latin America will be large enough to make a real market impact.

Amid such uncertainty, and with crude now trading at around $90 a barrel, OPEC ministers and officials say the group is likely to hold its formal output quotas steady at its Feb. 1 meeting in Vienna, but could move to cut output at its next meeting in March.

U.S. light, sweet crude was trading $1 lower at midday Monday, at $89.71 on the New York Mercantile Exchange, down about 10% from its nominal record Jan. 3 of $100.09 during intraday trading.

At its last meeting in December, OPEC kept production on hold, arguing that oil supplies were adequate and that high crude prices were being driven by speculative trading and other factors unrelated to supply and demand. The cartel's output accounts for 4 out of every 10 barrels consumed globally.

At the same time, traders say that OPEC members such as Saudi Arabia, United Arab Emirates and Angola have quietly added around 1 million barrels a day to world supply since early last fall - much of it above the formal limits the group sets on its own output. The world is now consuming around 86 million barrels a day, 32 million barrels of which are pumped by OPEC.

That added supply from OPEC has helped ease the unusually tight stockpiles in the U.S. and Europe during the last quarter of 2007. Tight inventories were among many factors that helped drive prices over $100 a barrel. In separate trips through the Middle East this month, President George W. Bush and his energy secretary, Samuel Bodman, pointed to tight stockpiles as evidence why OPEC should move to boost its output quotas.

What appears certain is that OPEC itself is going to see its own production capacity increase this year by as much as 1.4 million barrels a day, more than 50% higher from 2007, as projects in Saudi Arabia, Angola and Nigeria enter service. The kingdom alone is set to add almost 900,000 barrels a day in new capacity, from basically no increase in 2007, with much of that starting in the first quarter of this year.

After years of dashed expectations, non-OPEC supply is also expected to pick up. Some analysts see an increase of as much as 1 million barrels a day from suppliers such as Brazil, Sudan and even the U.S., though much of that is expected from non-traditional sources such as ethanol, biofuels and natural-gas liquids.

The big question for OPEC ministers is whether demand will be strong enough to mop up those new barrels. A sharp downturn in the U.S. economy would ricochet to other regions, nudging oil consumption down as well.

A number of investment houses are now downscaling their oil-demand growth forecasts for this year. So is the Paris-based International Energy Agency. Traders say that some big financial players are also hedging against a continued downturn in prices.

"Even if economic conditions remain flat in the U.S., spare oil production capacity and crude inventories will build up and that is going to put pressure on prices," says Larry Goldstein, an economist at the Energy Policy Research Foundation. "That will put OPEC in a tight box."

It could be difficult for OPEC to agree formally to lower its production ceiling, especially during a U.S. election year in which high oil prices are already a campaign issue. Saudi Arabia is particularly eager to keep oil prices from becoming a heated political issue in the U.S.

The kingdom surprised markets at an OPEC meeting last September when it spearheaded an OPEC production hike of 500,000 barrels a day after most analysts expected the group to simply keep pumping at the same levels. Some analysts contend that under certain circumstances, OPEC could actually move to boost supplies "either formally through a consensus agreement, or under the radar, as Saudi Arabia has done in recent months.

"Precisely because of heightened recession risks, one could make the case for pushing more barrels in the market to ease inflationary pressure [and] help sustain demand," says Antoine Halff, head of commodity research at Newedge, a New York brokerage.

Adding supply in the face of a bear market, though, would run counter to OPEC's instincts. The big mystery, if prices do continue to head downward, is whether OPEC will move to crimp supply to keep them from breaking, say, $70 a barrel.

Three years ago, when oil was still under $50 a barrel, OPEC ministers worried how the world would react if prices went above $60. But now many OPEC members - Iran and Venezuela above all - have come to depend heavily on prices being well over $80 a barrel.

"The longer these prices stay high," says Mr. Goldstein, "the more these governments will feel entitled to that price."

Dow Jones Span Tag: (Dow Jones Newswires from the Wall Street Journal)