OPEC Waits for Econ Recovery to Rebalance Oil Market

NEW YORK (Dow Jones Newswires), Sept. 10, 2009

OPEC is making the same risky bet as many investors that oil prices can avoid being dragged down by weak demand and excess supplies for a few more months.

The Organization of Petroleum Exporting Countries left production quotas unchanged after concluding its meeting in Vienna early Thursday. The group hasn't adjusted its official output since December, though members have increased production by about 750,000 barrels a day since the first half of the year, according to the U.S. Department of Energy.

Under different circumstances, such a hike might have proven devastating for oil prices and provoked OPEC into action, but crude futures have stabilized around $70 a barrel. Support from OPEC has been replaced by a weaker dollar and stronger equities, two factors seen predicting improving economic conditions. The assumption built into the market is that eventually, rising demand and tightening supplies will justify prices at their current level.

OPEC appears to have signed onto that view as well, with Saudi Oil Minister Ali Naimi telling al Hayat newspaper that stockpiles are high but "will start to drop in a short period," making further cuts unnecessary. Analysts say it's possible that the next few months will play out like Naimi expects - but that OPEC's inaction increases the risk of a major drop in prices if demand doesn't pick up.

"There's basically a complacent attitude all the way around," said Tim Evans, an analyst with Citi Futures Perspective in New York. "The market is complacent in thinking the extra barrels don't matter, and that leads to OPEC complacency that they don't have to be more disciplined."

OPEC may not have much choice other than to hope for an economic recovery to rebalance the market. Cutting production quotas won't do much good amid such widespread cheating, analysts say.

Members have a strong incentive to exceed their quotas to take advantage of high prices, even if it puts downward pressure on the market in the long run. OPEC agreed to cut production by 4.2 million barrels a day last year. Compliance has weakened at a steady drip, falling from above 80% in March, when oil futures traded at about $50 a barrel, to around 65% today, when oil sells for around $70. Production could rise even more if new fields off the coast of Angola start up on schedule later this year.

Even with a recovering world economy boosting demand, OPEC needs to stay near current level of compliance through mid-2010 to bring oil inventories back to normal, wrote Greg Priddy, global oil analyst with Eurasia Group, a consultancy.

However, the Department of Energy said in its monthly outlook Wednesday that oil supplies in developed countries will cover more than 60 days of demand into mid-2010, well above the five-year average of around 55 days.

Opinions vary hugely on when oil prices will stop riding financial factors like the dollar and equities. The relationship was as strong as ever this week. Futures rose sharply on Tuesday when the dollar hit a 2009 low against the euro, as crude, priced in U.S. currency, became relatively cheap for holders of other currency. U.S. equities indexes are also close to their high for the year.

October crude futures settled 21 cents, or 0.3%, higher, at $71.31 a barrel on the New York Mercantile Exchange on Wednesday.

"What we really need to see is people accept the fact that things aren't as good as everyone wants them to appear," said Brian LaRose, senior technical analyst at United-ICAP.  

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