With Oil Use Off, Market Yawns at OPEC Talk

NEW YORK (Dow Jones Newswires), Jan. 15, 2009

Saudi Arabia, the world's largest oil exporter, said it plans to cut output next month to below its OPEC-assigned quota. Even so, oil markets essentially yawned and continued to move lower.

Battered by continued signs of weak global oil demand and bulging inventories, U.S. crude oil futures dropped for the sixth time in seven days Wednesday. The market is so gloomy that it isn't willing to put much faith yet in the Organization of Petroleum Countries' attempts to rebalance the market.

February-delivery crude futures fell 50 cents to $37.28 a barrel Wednesday on the New York Mercantile Exchange, having fallen by 24% since Jan. 5 on oversupply concerns.

The questions of how low and how long for Saudi output ultimately may decide how low and how long for oil prices. But for now, the market remains skeptical.

Current prices are less than half of the $75 level that the Saudis -- who rarely comment on prices -- said was "fair" last month, when OPEC agreed to its biggest-ever output cut.

Oil isn't far from the previous "fair" price of $30-$34 pegged by Saudi Arabia's Oil Minister Ali Naimi back in May 2004, when the kingdom was boosting output to try to curb rising prices.

Naimi, attending an industry conference in India, said Saudi oil output in February would be below the 8.05 million barrel-a-day level assigned by OPEC, when it agreed to a 2.2 million barrel-a-day output cut beginning Jan. 1.

How Much Below 8 Million B/D?

"We are at 8 million," Naimi said, of current output. "We will look and see whether we need (to cut) more. If we need to, if inventories keep rising, we will reduce." He didn't elaborate and wouldn't comment on the possible level of March output.

Saudi output of 8 million barrels a day translates to a cut of 1.7 million barrels a day from the 25-year high level of 9.7 million barrels a day touched last summer when prices were soaring to record highs near $150 a barrel.

The Saudis haven't pumped below 8 million barrels a day since late 2002. While there has been some market talk that Saudi output could fall to 7.7 million barrels a day, industry sources said they have been told that the output level hasn't yet been agreed.

OPEC's Secretary General Abdalla Salem El-Badri said the group "will not hesitate" to cut output further, if needed, at its planned March 15 meeting. Iranian officials have said continued weak demand could require OPEC to cut output by an additional 1 million barrels a day in March.

Lawrence Eagles, head of commodity research at JPMorgan Chase in New York, said he has been surprised to see the "little impact" from the Saudi comment. "It shows how bearish the market has become," he said.

Aiming for Floor Under Prices

Still, although there are more questions than answers about their plans, "the Saudis are making it quite clear they don't want price to go any lower," he said. But in using words like "balancing the market," they also are showing they aren't aggressively trying to "squeeze it higher" with deep output cuts, he said.

"If they are cutting more than their own target, then they are taking an element of greater responsibility in terms of market management," said Eagles. But lacking details, it's unclear whether the Saudis would be willing to cut output further on their own. The kingdom has long renounced the role of swing producer that it played in mid-1980s, when it alone cut back output sharply to try to support prices against a rising tide of non-OPEC output. Prices still plunged and the Saudis lost market share, too.

Analysts said the kingdom plans to shut its 120,000 barrel-a-day Riyadh refinery for a monthlong maintenance turnaround in February, causing a drop in domestic crude oil need in the month.

Inventories Keep Rising

So far, OPEC's pledged output cuts of 4.2 million barrels a day since September haven't put a dent in bloated global stocks.

The U.S. Energy Information Administration projected Wednesday that company-held inventories in the major industrialized countries, like the U.S., are well above historical norms and are expected to remain there through 2010.

World oil demand is expected to drop this year by 0.9%, or 810,000 barrels a day, to 85.1 million barrels a day as economic turmoil cuts global consumption for the first time since 1983, the EIA said.

In the U.S., the world's largest oil consumer, demand is expected to fall by 2%, or 390,000 barrels a day, to 19.12 million barrels a day, the lowest level since 1998, the EIA said. Current quarter demand is expected to average 19.21 million barrels a day, down 3.4%, or 670,000 barrels a day, from a year ago.

The EIA projects OPEC will only deliver on half of the pledged 4.2 million barrels a day of output cuts. But the combination of those cuts, sliding demand and rising non-OPEC production, will increase spare capacity in the market, keeping pressure on prices. The world's supply cushion is expected to hit 4 million barrels a day this year, and rise to 4.7 million in 2010, compared with less than 2 million barrels over the past several years.  

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