OPEC Gathers for Emergency Meeting As Likely Output Cut Looms

VIENNA (Dow Jones Newswires), October 23, 2008

Eager to rein in what it terms an alarming slide in oil prices, OPEC is likely to cut production at its emergency meeting this week but questions remain over how deep the decrease should be.

The Organization of Petroleum Exporting Countries will meet in Vienna on Friday as oil prices skirt 16-month lows, pushed down by evidence of waning demand in large consuming nations and fears that a binding global recession will depress consumption even further.

Analysts expect the group to respond by taking at least 1 million barrels a day of oil off global markets though some within the cartel continue to push for a deeper cut. Reaching agreement within the group on what could prove a high risk policy adjustment will be challenging as OPEC seeks to prevent a total collapse in the price of oil at a time of weak global economic growth.

Saudi Arabia's oil minister Ali Naimi, OPEC's de facto leader, declined to tip his hand upon arrival here Thursday, saying oil prices were determined by the market. He hinted however, that supply and demand for oil may be unbalanced. When asked if the market was out of kilter, he said: "What do you think? Look at what the EIA data has been showing," he said, but didn't elaborate.

Naimi was referring to a continued build in oil inventories in the U.S., which rose 3.2 million barrels last week, to above the five-year average, according to the Department of Energy.

Others arriving for the hastily-convened OPEC meeting have been clear in their desire to pare back production in a bid to boost oil prices. Iran's oil minister Gholam Hossein Nozari said OPEC should cut output by about 2 million barrels a day. Venezuela's oil minister Rafael Ramirez said the group needed a "substantial cut" of at least a million barrels a day to avoid a collapse in oil prices in 2009.

Group president Chakib Khelil said sluggish demand was already leaving some producers unable to sell some crude. The global banking crisis will hurt new oil development and is already forcing many companies to drop oil projects, said Khelil, who is also Algeria's oil minister. Even if oil prices return to $90 a barrel, that wouldn't be enough in some cases to secure adequate financing for projects, he said, implying that supplies would eventually tighten considerably, leading to an upside shock in prices.

Battling Recession Fears

Pushing through what could amount to a series of oil production cuts represents a lofty challenge for OPEC against the backdrop of the global financial crisis and real fears about a binding recession taking hold across the world. It also raises the perennial question of who should do the cutting.

Producers such as Nigeria, Iran and Venezuela, which are already under growing fiscal pressure, will be loath to cut back even in the face of falling prices. So that job will fall largely to Saudi Arabia, OPEC's largest producer by far. The Saudis until now have been hesitant to reduce output this year, but analysts agree the kingdom is serious about ensuring prices don't fall below $60 a barrel.

The very fact that OPEC is meeting now - rather than next month as scheduled only recently - and ahead of the U.S. presidential elections is seen as evidence the group favors a cut.

Some analysts say Gulf OPEC countries have already begun taking production off the market in response to weak demand.

"In response to faltering demand, Saudi Arabia has already sliced output, removing much of the extra barrels that resulted from the Jeddah initiative (in June) so that output is close to (its OPEC) target at around 9 million barrels a day," said Bill Farren-Price, energy director at Medley Global Advisors. He was referring to a quickly-arranged meeting sponsored by Saudi Arabia at which the kingdom boosted its output to tame crude prices.

Still, oil market participants are skeptical about the initial impact a production cut might have on prices, which are trading below $70 a barrel and have tumbled more than 50% from peaks near $150 a barrel hit in July.

"I could see as a likely scenario that they cut, and there's not too much short-term impact on the price of oil," said Peter Donovan, vice president of Vantage Trading in New York. "They cut again, and over time these production cuts eventually work. It's not like, snap your fingers and it's done."

At 1611 GMT, December Nymex light, sweet crude oil futures were trading $2.31 higher at $69.06 a barrel.

A cut of 1 million barrels a day would result in a small draw on global inventories in the remaining months of 2008, followed by a more substantial drop in the first quarter of 2009, wrote analysts with JBC Energy. But the impact to oil prices "will also in the end rely on market sentiment, which is dependent on the shape of the global economy," JBC wrote.
Talk Of Successive Cuts
Already, some within OPEC are talking about a series of production cuts, with the group scheduled to meet again on Dec. 17 in the Algerian town of Oran. Venezuela, firmly within OPEC's hawkish camp, is pushing for another production cut in December on top of a cut of 1 million barrels a day now.

"If we do nothing there is a risk of a price collapse," said the nation's oil minister, Rafael Ramirez. "We need to act now."

Ramirez also resurrected the notion of OPEC adopting a price band, this time of between $80-$100 a barrel. Venezuela led the creation of the last price band in 2000, with a $22-$28 range. The band was designed to be a guideline for suggesting when OPEC should consider output adjustments, but not an absolute trigger.

Saudi Arabia was thought to have never supported the band and ultimately used a steep decline in the dollar at the time as a justification for keeping oil prices outside the band, which was scrapped in January 2005. Prices have traded consistently higher ever since.

Asked about the difficulty of managing the band system, Ramirez said it was a viable option that was discarded due to the Iraq war and oil market speculation.

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