Weak US Oil Use Data May Prompt OPEC Cut

NEW YORK (Dow Jones Newswires), March 12, 2009

The U.S. energy secretary says OPEC needs to be cautious about considering deeper oil output cuts.

OPEC, instead, may listen to the U.S. oil market, which signals the taps need to be tightened further, to keep a floor under prices near $40 a barrel.

The latest data from the world's biggest oil consumer strongly argue the point. Current four-week U.S. oil demand is at its lowest level since early December, meaning it is still as weak as it was when the Organization of Petroleum Exporting Countries agreed to its biggest-ever output cut.

As OPEC prepares to review output policy at a meeting Sunday in Vienna, U.S. oil prices are averaging just above $41 a barrel this year, about $1 above where they were when ministers last met. Prices ran up 11% on Thursday to $47.03, in part on vague comments from Russian Vice Prime Minister Igor Sechin that the biggest non-OPEC producer supports further OPEC cuts and "will participate in this work."

The U.S. Energy Information Administration cut its global oil demand outlook through 2010. Some analysts see the gloomy outlook as possibly driving crude price to test the $32.40 a barrel low from Dec. 19. BNP Paribas on Thursday predicted second-quarter U.S. crude will average $35, a quarterly level unseen since the start of 2004.

U.S. oil demand in the latest four weeks is down 5.8%, or 1.2 million barrels a day, from unrevised year-earlier levels, at 19.348 million barrels a day, the EIA data show.

Crude Stocks At 15-Year High

Crude oil inventories stand at a 15-year high for this time of year, relative to refiner demand.

"OPEC take note...in the U.S. lower imports (are) merely keeping stocks flat. No draws," said Michael Wittner, head of global oil market research at Societe Generale.

Countering earlier signals, latest EIA forecasts show first-quarter gasoline demand down 1.1% from a year earlier. While a fill-up at the pump may cost just half of last year's record level, demand isn't expected to grow year-on-year in the peak driving season or for the full year.

"Continued economic weakness" will cut 2009 total U.S. oil demand by 2.2% to its lowest level since 1998, at 19 million barrels a day, the EIA said.

World oil demand will show its biggest drop in 27 years this year, falling by 1.38 million barrels a day to 84.27 million barrels a day, the EIA projected. Global demand will rise by 1%, or 880,000 barrels a day, in 2010, but that forecast is down 320,000 barrels a day from February.

Brimming inventories in the major industrialized nations are expected to stay above normal levels 2010, despite OPEC's aim of keeping inventories in check, and will weigh on prices.

All Eyes On The Saudis

OPEC kingpin Saudi Arabia, the world's largest oil exporter, tempered widespread expectations of new output cuts in saying members must fully comply with pledged cuts of 4.2 million barrels a day before acting further. By industry estimates, OPEC overshot its targeted output of 24.85 million barrels a day in February by anywhere from 750,000 barrels a day to nearly 1.4 million barrels a day.

Whether the Saudi stance will spark a steep price slide, or ultimately pull more barrels out of the market from other producers remains to be seen. But the market will be highly skeptical about the potential for further cuts - and price stability - if the Saudis won't budge.

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