Opec puts output cut on hold

Tough decisions: Saudi Arabia's Oil Minister Ali Naimi at the opening session of yesterday's meeting in Cairo

Opec has deferred a decision on a new oil supply cut amid signs that Saudi Arabia and its Gulf allies are demanding tighter adherence to restraints put in place over the past two months.

Gulf producers want to see strict compliance with recent output curbs of 2 million barrels per day before considering further reductions when the group meets in Algeria on 17 December.

"Compliance I think is OK," said Kuwaiti Oil Minister Mohammad al-Olaim. "But the market conditions require us to be 100% compliant."

Delegates said that ministers discussed how much more they needed to cut in December.

Most, including Gulf producers led by Saudi Arabia, saw a requirement to slice another 1 million to 1.5 million bpd. But for that to happen, delegates said, Riyadh wants proof that all fellow members are meeting their part of existing curbs.

"We are very concerned about over-production," Qatar's Oil Minister Abdullah al-Attiyah told Reuters.

While Opec's first priority is to put a floor under a $90-collapse in oil prices to $55, Saudi Arabia for the first time in years identified a "fair" price - $75 a barrel.

That target will serve as a reference point for traders when world oil demand starts to emerge from the current recessionary slump.

But for now, the oil market is focused on whether Opec can prevent prices falling further by avoiding the sort of divisions that have undermined its response to falling prices during previous economic downturns.

"$75 a barrel doesn't look doable in the short term," Raja Kiwan of consultancy PFC Energy told Reuters. "Given the fractious nature of Opec on quota compliance, they may have some problems."

Delegates identified Iran and Venezuela, perennial price hawks who have urged quicker cuts, as particular sources of concern on quota compliance. Venezuela denied the claim. Iran made no comment.

But consultants Petrologistics estimated last week that, based on shipping data, Iran's production would fall by 80,000 bpd this month, much less than the 199,000 bpd it is due to cut.

Opec will want to keep any bickering under wraps.

Secretary General Abdullah El-Badri said compliance already was "100%" and Opec president Chakib Khelil said in an official statement that members were "fulfilling their commitments".

Early industry estimates show Saudi Arabia and its Gulf neighbours making good their share of Opec's 2 million bpd of cuts since September.

Petrologistics data estimated Opec output falling by 1.22 million bpd in November, with nearly half of that reduction shouldered by Saudi Arabia - Riyadh is only responsible for about a third of Opec output.

Opec may need to make larger cuts to balance the rapid decline in demand among Western economies that has caused inventories to swell. World oil demand is set to contract this year for the first time in 25 years.

"The bottom line is that they need to cut again and they need to cut substantially," said Gary Ross of consultancy PIRA Energy. "Demand is falling out from beneath them."

Saudi Arabia's Oil Minister Ali Naimi said he would like to see inventory cover among OECD industrialized nations down to 52 days from current levels of 55 to 56 days of forward demand, the top of the seasonal norm.

Opec has a mixed record of dealing with downturns in the economy that curb energy demand.

In 2001 it successfully defended prices by removing 5 million bpd in four stages, 19% of its supply, laying the foundation for a six-year boom in oil prices that culminated this summer in a record $147 a barrel.

But in 1997 in Jakarta, at the start of the Asian financial crisis, Saudi Arabia pushed through an Opec increase after Venezuela openly flouted its supply quota by a large margin.

Prices went into a tailspin and US crude hit a low of $10.35 at the end of 1998.

Newsletter signup


Become an Upstream member!

Membership includes a subscription to our weekly newspaper providing in-depth news from the energy industry, plus full-access to this site and its archives. Still not convinced? Try our free trial.

Already a member?