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ANALYSIS: Oil cartel braces for difficult times

HANDS ARE TIED Despite cutting output twice this year by a total of 2 million barrels per day, OPEC has failed to prevent crude prices from sliding below US$50


Algerian Oil Minister and OPEC president Chakib Khelil arrives for a news conference in Cairo, Egypt, on Saturday.


The OPEC oil exporting cartel, suffering from plummeting oil prices, faces further pain next year as a worldwide recession dampens demand for crude even more, analysts said.

“OPEC is dealing with tough circumstances, the toughest in 10 if not 30 years,” Raad AlKadiri of PFC Energy said on the sidelines of OPEC’s informal gathering in the Egyptian capital.

Although OPEC ministers decided on Saturday to keep output unchanged, they also vowed to cut production next month in the face of flagging demand and despite the global financial crisis.

“We took note of the serious deterioration in the world economy and its serious consequence on the oil price,” OPEC president Chakib Khelil said, adding that “negative growth in [oil] demand is possible” next year.

“We realize that in the first quarter of next year we are probably going to have a decline in demand, and in the second quarter we are going to have a big decline,” Khelil said.

OPEC, which pumps 40 percent of the world’s oil, has already slashed its output twice this year by a total of 2 million barrels per day in response to falling prices.

But the production cuts, agreed in September and October, failed to stop prices sliding under US$50 a barrel last month as concern mounted about a global recession that has already infected the eurozone and Japan.

Analysts said that OPEC’s hands were tied because cutting output could damage the world economy even more.

“With much of the world in or heading towards a recession, OPEC does not have a huge amount of political leverage in being able to dramatically reduce production,” BetOnMarkets analyst Dave Evans said in London.

“They have to support crude prices while at the same time ensuring that they do not do long-term damage to the global economy. They cannot afford to bite the hand that feeds,” he said.

Earlier last month, Brent North Sea oil plunged to US$47.40 and New York crude touched US$48.35, marking the lowest points for nearly four years, as recession concerns intensified.

That compared with their respective record highs of US$147.50 and US$147.27 on July 11, when supply concerns had sent them rocketing.

“The economic data is changing and getting worse every other week,” said analyst Bill Farren-Price at Medley Global Advisers.

“The US new demand data for September … shows 13 percent demand contraction in [oil] products consumption. And that’s very serious,” he said.

OPEC also said on Saturday that the market would not recover before the second half of next year amid the looming global recession.

Evans warned that the impact on energy demand — and oil prices — would depend on the severity of the sharp economic slowdown.

“Recessions are often officially announced many months after one actually starts, but whether one is ‘officially’ declared or not, the US, UK, Japan and most of Europe are in recession. Even the Chinese behemoth is slowing,” he said.

“Subsequent energy demand depends on how protracted the decline turns out to be. If it looks like the global slump will get worse than currently expected, then energy demand will fall further,” he said.

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