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Sat, Dec 11, 2004 - Page 12 News List

OPEC may cut supply to avert slump

OIL Surprised by the speed at which prices have been dropping, some officials are favoring a return to official quotas to slash production and prevent an oversupply


After pumping oil at close to full capacity for several months in a bid to bring prices down from record levels, OPEC ministers said on Thursday that they were considering curbing output and taking some oil off the market to prevent a price slump.

While oil prices in New York are still up 30 percent this year, they have dropped by nearly a quarter since touching US$55.67 a barrel in late October. On Thursday, light sweet crude for delivery in January rose US$0.59 to US$42.53 a barrel on the New York Mercantile Exchange as oil traders reacted to the possibility of a production cut.

Benchmark light, sweet crude for January delivery traded at US$42.30 per barrel mid-afternoon on Friday in Asia on the New York Mercantile Exchange in electronic trade, down US$0.23 from its overnight closing price.

Traders were awaiting the OPEC meeting yesterday in Cairo, Egypt, which they fear could lead to slashes in production and worries over distillate supplies, which include heating oil, if the Northern Hemisphere winter is colder than expected.

"Some members -- Iran, Kuwait and Venezuela -- have been quite vocal about their desire to return to official quotas, which would effectively reduce OPEC output by 1 million barrels per day," said New York-based analyst George Orwel in an Energyintel research note.

OPEC is now producing at its highest rate in 25 years to meet record demand. But as consumption growth is expected to slow next year, OPEC will seek to prevent an oversupply of oil in the market as well as anticipate a seasonal decline in the second quarter.

The recent drop in prices was expected, said Mohammed bin Dhaen al-Hamli, the oil minister from the United Arab Emirates, "but the speed of the decline was a surprise."

Over the last four years, it has been OPEC's policy to act pre-emptively to keep its benchmark price around US$25 a barrel, but it now wants to defend higher prices, around US$35 a barrel, analysts said. The benchmark price OPEC uses stood at US$33.78 a barrel on Wednesday.

OPEC members now pump about 28 million barrels a day, a million barrels above their quota of 27 million barrels. Curbing the oversupply, in effect, would mean that members would stick closer to OPEC's self-imposed ceiling.

Including oil from Iraq, which is a member but has not been assigned a production quota since the 1990s, the group's output is about 30 million barrels a day, a level not reached since 1979.

The strongest call for a cut in production came from Kuwait's oil minister, Sheik Ahmad Fahd al-Sabah.

"We have to cut off all our overproduction," the sheik said, suggesting production cuts of a million barrels a day or more.

Representatives of Venezuela, Qatar, Libya and the United Arab Emirates also said they favored reducing oil production to the level of OPEC's official quota.

The exact extent of the production cut is uncertain because Saudi Arabia, the world's largest oil-exporting country and OPEC's most powerful member, has yet to show its hand. OPEC production decisions take about two months to affect the physical oil market.

Whatever the size of the cut, it will take effect Jan. 1, said a delegate from a gulf member of OPEC who declined to be identified. He suggested that OPEC would call for an emergency meeting at the beginning of February to fine-tune its action. OPEC, which accounts for a third of the world's oil production and half of global exports, is next scheduled to meet in March in Iran.

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