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OPEC may cut oil production

With oil prices off nearly 30 per cent from their highs of almost $150 a barrel, OPEC oil ministers are considering what was unthinkable just a few weeks ago cutting back output to prop up the cost of crude.

business Updated: Sep 08, 2008, 00:01 IST
George Jahn
George Jahn

With oil prices off nearly 30 per cent from their highs of almost $150 a barrel, Organisation of the Petroleum Exporting Countries (OPEC) oil ministers are considering what was unthinkable just a few weeks ago cutting back output to prop up the cost of crude.

No one is predicting much of a cutback if any at all. Still, such a move would not even have been thought of with oil prices setting record after record back in July.

But the bull run appears to have paused, if not ended, which means a new look at options for Tuesday’s meeting of the 13 ministers at OPEC’s Vienna headquarters.

Since crude surged to a record $147.27 a barrel on July 11, it has tumbled by over $40, or more than 27 per cent. Back then, OPEC’s main concern was pushing back against arguments from the US and other key consumers that an output increase was needed to end rocketing prices. Oil ministers insisted there was adequate supply to meet demand, and blamed speculators and a weak US dollar for crude’s stellar rise.

But now, the greenback has strengthened, world demand has decreased due to creaky economies, traders’ appetites for commodities have cooled and suddenly the market appears to have turned bearish.

Light, sweet crude for October delivery fell $1.66 to settle at $106.23 a barrel Friday on the New York Mercantile Exchange — its lowest close since early April.

The downward spiral has led to calls from OPEC price hawk Iran — the group’s second-largest producer — to reduce output from the nearly 30.5 million barrels a day being pumped last month by the organisation’s members.

Not far behind is Venezuela. While moderating recent demands for immediate output cuts, Venezuelan Oil Minister Rafael Ramirez has drawn the line at $100 per barrel of oil.

Anything below that should serve as a wake-up call for OPEC to tighten the spigots, he says — sentiment that is shared by other OPEC members. Still, a major cutback is unlikely without Saudi compliance, and the Saudis — de-facto OPEC policy setters who are now producing nearly a third of total OPEC output — have given no hint they favor that option. Saudi Oil Minister Ali Naimi has instead talked about a floor of $80 as the red line for action.

OPEC has reason to be cautious. Despite their precipitous fall, prices remain 14 per cent higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago.

Any OPEC move on Tuesday to pare back output would send a howl of protest from the US and other major consumers, and give a larger platform to Republican presidential candidate John McCain and Barack Obama, his Democratic counterpart, to call for reduced dependence on foreign oil.

Additionally, OPEC understands that high prices drive down demand and will likely try to find a balance between high profits and a price that the market can accept.

In a forecast last month, OPEC predicted that the world’s forecast appetite for oil for this year overall will have fallen by 30,000 barrels a day and noted that world demand growth next year will be “the lowest since 2002.”

And on Wednesday, the US Energy Administration reported a 3.5-per cent drop for products including gasoline and other oil-based products compared with last year. Such factors have led some experts to predict OPEC would opt for no change.

“The ministers will hold the status quo (although) there is going to be the usual jawboning from the usual suspects” for a cutback, says trader analyst Stephen Schork.

Even now, “oil is by no means cheap and that is certainly adding a lot of pressure to the (world’s) economies — the smarter ones, the Saudis, the Qataris the Kuwaitis are aware of this.”

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