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OPEC set to slash oil output as prices crumble

OPEC, the cartel pumping 40 per cent of world oil, is this week set to announce plans to slash output in the hope of lifting crude prices weighed down by a recession-fuelled slide in energy demand.

business Updated: Dec 14, 2008 16:32 IST

OPEC, the cartel pumping 40 percent of world oil, is this week set to announce plans to slash output in the hope of lifting crude prices weighed down by a recession-fuelled slide in energy demand.

The Organization of Petroleum Exporting Countries on Wednesday convenes in the Mediterranean port city of Oran, Algeria, where it is widely expected to announce plans to cut its oil output quota for a third time since September.

"The cartel is likely to announce further cuts of at least two million barrels," predicted the chief analyst at consultancy Capital Economics, Julian Jessop.

Analysts are forecasting a cut of between one and two million barrels from OPEC's official daily output quota of 27.3 million barrels, excluding Iraq.

"OPEC's actions are not in themselves going to drive prices higher again ... OPEC cut production just as aggressively during the last global downturn in 2001 and 2002, but oil prices did not take off until 2004 when the world economy grew by nearly five percent," said Jessop.

He added: "The fact that oil prices have continued to fall despite OPEC's announcement of cuts in production totalling two million barrels per day over the last two months underlines the impotence of the cartel in the face of rapidly deteriorating demand."

Crude futures have dived by as much as 70 percent since reaching all-time highs of above 147 dollars a barrel only five months ago, when fears of supply disruptions had sent them rocketing.

The ability of OPEC to influence the market will also depend on whether it succeeds with a campaign to convince major non-member producers such as Russia, Mexico and Norway to reduce their output too.

It scored a success last week when Russia said it was ready to join forces with the cartel to stem the plunge in crude prices, but Moscow has not given any detailed plans yet.

Russia ranks alongside Saudi Arabia, de facto leader of the cartel, as the world's largest oil exporter.

OPEC member nations and non-OPEC oil-producing countries are seeing their incomes crumble as crude prices fall further from record heights reached in July.

Ahead of Wednesday's meeting, a number of OPEC ministers have stressed the need for a cut in production. The cartel's president and Algerian energy minister Chakib Khelil on Thursday said the Oran gathering "should result in more cuts to balance supply and demand."

Libya went further, with its OPEC representative Shukri Ghanem stressing that the oil producers group should commit to a "substantial" reduction in output to help support prices.

The International Energy Agency (IEA) on Thursday said it expected global oil demand to fall this year for the first time since 1983.

Commenting on Wednesday's meeting of OPEC, it added: "Perceived wisdom focuses on how much the reduction will be rather than whether it will occur."

OPEC has so far agreed on cuts of 2.0 million barrels per day this year but the IEA -- a Paris-based energy policy advisor -- has cast doubt on the willingness of some members of the cartel to reduce their production.

Collins Stewart analyst Gordon Gray meanwhile noted: "The sharp fall in crude prices has been driven in large part by the speed at which demand estimates have been cut, coupled with a high degree of scepticism over OPEC's ability to respond."

Oil prices plunged below 40 dollars a barrel at the start of December to their lowest levels in nearly four years as worse-than-expected jobs data in the United States raised the prospect of severe falls in energy demand.

Prices began 2008 by vaulting above 100 dollars a barrel for the first time, underpinned by strong energy demand in China and fears of supply disruption in major crude exporter Iran.

OPEC comprises Algeria, Angola, Ecuador, Iran, outgoing member Indonesia, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Iraq is the only member without an output quota owing to persistent unrest in the country.