OPEC might need to cut supplies by as much as 1.5 million bpd by early next year

OPEC likely to trim oil supply

Barbara Lewis and Simon Webb
Friday, September 05, 2008

LONDON/DUBAI — Slower demand, an economic downturn and cheaper oil could convince OPEC it needs to trim supply unofficially, but the producer group is expected to leave public output targets unchanged when it meets next week.

Prices have plunged from a peak of more than $147 (U.S.) a barrel in July after leading oil exporter Saudi Arabia took a unilateral decision to pump at the fastest rate since 1981.

At the same time, demand in top oil consumer the United States fell at the fastest rate since 1982 in the first half of this year and traditional price hawks Iran and Venezuela have raised the prospect of reining in oversupply.

Given the potential for oil stocks to build, the Organization of the Petroleum Exporting Countries (OPEC) will need to cut output at some point this year to prevent a further price fall, said David Kirsch of Washington-based consultancy PFC Energy.

“The question is not whether to cut, but when,” said Mr. Kirsch. “But... do you want to be taking oil off the market when you are heading into essentially peak demand in the fourth quarter?”
Consensus was building within OPEC, supplier of more than a third of the world's oil, on the need to reduce output, he said.

But with the price still above $100 a barrel, OPEC could be reluctant to risk the political backlash of making a public cut at its meeting late on Tuesday in Vienna.
“This will be a quick meeting, of that I am sure,” said one OPEC insider on condition of anonymity. “The most likely outcome will be to roll over formal output quotas.”

The clamour for more oil from consumers has abated as the price has fallen, but record fuel costs triggered protests world-wide earlier this year and oil has been one of the top issues in the U.S. election campaign.

Soaring prices meant OPEC members earned almost as much money from oil exports in the first seven months of this year as in the whole of 2007, according to U.S. government data.
“It would be unseemly of OPEC right now to officially cut production,” said Adam Sieminski, chief energy economist at Deutsche Bank. “But a quiet understanding to trim back production might be the order of the day.”

OPEC supply has been rising since May, led by extra production from Saudi Arabia and any call for tighter compliance would apply mostly to the kingdom.

It pledged to pump at 9.7 million barrels per day (bpd) from July, about 750,000 bpd above its target. Some independent assessors have said Saudi never reached 9.7 million bpd, but the kingdom has not confirmed this.

Other OPEC members have very limited spare capacity and are producing much closer to agreed levels.

The twelve of OPEC's thirteen members that have targets pumped a total of 790,000 bpd above their collective ceiling in August, according to a Reuters survey.
Informal rather than formal changes provide a means to test how much oil the market needs and how high a price consumers can stand.

OPEC meets again in Algeria in December, by which point the group might feel able to make a public output cut, sending a more decisive signal to the market.

“We can take this step later if we consider it necessary,” said Iran's OPEC Governor Mohammad Ali Khatibi this week. “There are so many factors that are uncertain right now, we may need to do this in December.”

He said OPEC might need to cut supplies by as much as 1.5 million bpd by early next year and could make a start at Tuesday's meeting by reining in supply above targets.

Together with Venezuela, Iran has implied it wants oil prices of no less than $100 a barrel. Both have big-spending populist governments that need high oil revenues, and were the first to raise the alarm as the price fell.

Others from OPEC, including Saudi Arabia, have taken a more moderate line. Saudi King Abdullah said in July after oil hit a record of $147.27 the kingdom was “already unhappy” when the price first hovered around $100 earlier this year.

Another OPEC source said last month the producer group was unlikely to make any formal cuts unless the price for OPEC's oil slipped below $80 a barrel.

To an extent, the impact of lower prices on producer finances has been offset by a strengthening dollar.

It has recovered from record lows earlier this year as the global economy has slowed and investors have started to price into other currencies interest rate cuts around the world, following aggressive cuts by the U.S. Federal Reserve.

The producers are in uncharted waters. Prices have risen more than five-fold in the past six years, and a year ago the idea of a cut at these prices would have been unthinkable.

At a meeting in Vienna in September 2007, when oil prices were below $80 a barrel, OPEC agreed a modest output increase of 500,000 bpd. It has since kept its production targets steady.
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