OPEC is divided on output cuts

Tolerable oil prices and a world economy headed towards recovery may give OPEC little reason to change its output targets when its ministers meet.

Ali al Naimi, the Saudi Arabian oil minister, said the oil market was "in good shape".

VIENNA // Tolerable oil prices and a world economy headed towards recovery may give OPEC little reason to change its output targets later today, when its ministers meet after Ramadan fasting. However, some analysts and at least one OPEC delegate are reluctant to rule out a cut. "Growing concerns that total oil inventories have not been drawn down rapidly enough could spur additional action," said PFC Energy in a research note.

"The initial euphoria over green shoots transforming into sustained growth is fading," the consulting firm noted. "The OPEC delegations clearly recognise that fundamentals remain weak and that conventional thinking will not avert a potential decline in oil prices." Arriving in the Austrian capital early yesterday, the Saudi oil minister, Ali al Naimi, said the oil market was "in good shape", with current crude prices of about US$70 per barrel "good for everyone".

But the Nigerian petroleum minister, Rilwanu Lukman, said prices "could be better", and he was concerned about the bulging inventories overhanging the market. That is a concern many analysts share. "US inventories have been pared, but there is still a glut," said Stephen Schork, the editor of The Schork Report, an energy newsletter. The issue of sliding member discipline could also make for a contentious meeting and is something OPEC may need to address sooner rather than later. "OPEC doesn't want the market to get away from them," said David Kirsch, the director of market intelligence at PFC.

Compliance with the record cuts of 4.2 million barrels per day (bpd) that the group announced last autumn and winter peaked at about 80 per cent in March, but has recently slipped to less than 70 per cent, with Angola, Iran and Venezuela being the principal offenders. The gradual rise in OPEC output in the past six months has contributed to the oil stockpiles that have recently prevented crude from rising above $75 per barrel, a mark the group has identified as necessary for investment in new supplies.

Rising oil exports from Russia, the only country with oil production to rival Saudi Arabia, is compounding OPEC's problems. Investors had expected Russian supplies to fall this year after Igor Sechin, the Russian deputy prime minister, told OPEC that his government was ready to limit them to support prices. Instead, Russia introduced tax breaks for new fields in Siberia and lowered its taxes on oil exports.

"In no uncertain terms, Russia has been the biggest beneficiary of OPEC's sacrifice," Chris Weafer, the chief strategist at UralSib Financial in Moscow told Bloomberg. "Higher prices have equalled a $20 billion (Dh73.46bn) tax windfall." For the first time in more than a year, OPEC has not invited Russia or other oil producers from outside the group to observe its meeting. That could portend another September surprise from the group, following unexpected decisions at its two previous early autumn meetings.

A year ago, with crude still close to $100 per barrel, OPEC unexpectedly agreed to trim production of 520,000 bpd through stricter compliance with formal quotas, reversing the 500,000 bpd of increased output that Saudi Arabia had pledged just two months earlier, as prices surged to a record $147. The previous September, OPEC surprised markets by raising its production target by 500,000 bpd to cool prices that were near today's level.

But in the current environment, because of the inventory overhang, a decision to increase output is highly unlikely. If OPEC does decide not to act, it could be because it realises it has little market leverage until the economy and oil demand improve. But the group may not have to wait that long for prices to strengthen. "Oil prices are expected to continue to be driven mainly by financial indicators. It seems only a matter of time before another wave of euphoria in equities boosts oil market sentiment," the British firm KBC Market Services said in a report.

"Oil prices may trade lower for a period, but a return to the $70-$75 range could occur quite soon." [e-mail]