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OPEC calls for end to overproduction

Oil&Gas Materials 14 March 2009 22:20 (UTC +04:00)

OPEC ministers called Saturday for an end to overproduction by some members as they sought to boost oil prices by eliminating nearly 1 million barrels a day from the world's supply without further shocking the anemic world economy.

Their comments suggested that Sunday's oil ministers' meeting of the Organization of the Petroleum Exporting Countries might opt for a call on all members to honor production quotas, instead of deciding to slash output outright.

Most members of the 12-nation organization had been clear in favoring reduced output in the days preceeding Sunday's full meeting of the Organization of the Petroleum Exporting Countries. Still they had left open whether they want to lower output quotas - or if they favor a solution less likely to hurt the struggling global economy by simply seeking to end overproduction by some nations above levels allotted to them.

The latter prospect appeared more likely on the eve of the meeting, reflecting OPEC recognition that direct cuts could backfire.

While slashing production could raise prices in the short term, it could also lead to further depressing demand, as struggling economies cut back on pricey crude they cannot afford. Pushing for full quota compliance instead would be less harmful.

OPEC cuts agreed on since September were meant to take a daily 4.2 million barrels off the market. But the 11 members under production quotas are still overshooting their joint daily target level of just under 25 million barrels by about 800,000 barrels a day.

OPEC regularly overproduces. But even if the group cannot fully meet its target, more quota discipline would lead to reduced world supply at a time of depressed demand, even if OPEC succeeds in taking no more than a few hundred thousand barrels more off the market. That could be enough to raise prices moderately, without sending shock waves through shaky world economies.

OPEC powerhouse Saudi Arabia, which has pumped less oil than its quota to compensate for overproduction by Iran and others, was thought to favor the option of higher quota adherence.

"We like to see compliance as high as possible," Saudi oil minister Ali Naimi told reporters. "It's over 80 percent now. It can be better."

Abdullah bin Hamad Al Attiyah, Qatar's minister of energy and industry, was more direct. Asked whether he favored slashing output, he said: "We should first ensure full compliance."

A relatively strong comeback in prices may help the Saudis and other Gulf producers make their case. Prices have rallied from below $35 a barrel last month, with a barrel of benchmark crude fetching over $46 a barrel on the New York Mercantile Exchange Friday. Earlier in the session, prices peaked at $48.14.

There is no question the ministers want to bolster prices. While off its low of around $30 just a few weeks ago, a barrel of crude still fetches less than a third of what it did over the summer. That is well below the break-even point for producing nations, which could affect not only their national budgets, but oil production as well.

"We want better prices," said Nigerian oil minister Rilwanu Lukman. Asked if his country would be happy with $70 a barrel, he replied: "That would be nice."

But as the world grapples with the worst recession in decades, OPEC ministers realize they have to tread lightly.

"It doesn't make sense that they should announce a further cut with the world in recession. They still have 800,000 barrels (of overproduction) to go," said London-based analyst John Hall.

Two reports published Friday supported arguments that oil supply was ahead of demand.

At the same time, they served as an indirect warning: drive up prices more and face even less demand in a sputtering global economy that already has cut back on consumption.

The International Energy Agency said world demand would drop for a second consecutive year for the first time since 1982-1983. In its closely watched monthly survey, the IEA cut its earlier forecast for demand this year by 270,000 barrels a day to 84.4 million barrels a day - 1.5 percent lower than a year earlier.

"The eventual resumption of global demand growth will largely depend upon much stronger economic performance than is currently the case" among the world's biggest energy consumers, said the agency, adding that the latest indicators are "not encouraging."

An OPEC report, meanwhile, noted that demand for oil produced by the cartel - which can supply more than a third of total world output - was expected to fall this year to 29.1 million barrels. That would be a substantial decline of 1.8 million barrels a day compared to 2008.

Venezula's Rafael Ramirez reflected the quandry OPEC members were facing.

"In the short term, we need to reach a base price of $70 a barrel," he said.

At the same time, he noted that OPEC needed to be "watching the world economic situation very carefully - it has become much worse than anybody ever imagined."

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