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OPEC to defer new oil cut as divisions emerge


Sat Nov 29, 2008 6:31am EST

By Rania El Gamal and Alex Lawler


CAIRO (Reuters) – OPEC on Saturday prepared to defer a decision on a new supply cut amid signs that Saudi Arabia and its Gulf allies are not happy with adherence to restraints agreed in the past two months.

Ahead of a 3 p.m. meeting, Gulf ministers said they wanted to see strict compliance with two recent oil output curbs before considering further cuts when the Organization of the Petroleum Exporting Countries meets next in Algeria on December 17.

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

While OPEC’s first priority is to put a floor under a near-$100 collapse in oil prices to $54, Saudi Arabia for the first time in years identified a “fair” price — $75 a barrel.

“There is a good logic for $75 a barrel,” said Saudi Oil Minister Ali al-Naimi.

“You know why? Because I believe $75 is the price for the marginal producer. If the world needs supply from all sources, we need to protect the price for them. I think $75 is a fair price.

That target will serve as a useful guideline on the horizon 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 avoid the sort of divisions that have plagued past efforts to prop up oil prices during a downturn.

“$75 a barrel doesn’t look doable in the short term,” said analyst Raja Kiwan at PFC Energy. “Given the fractious nature of OPEC on quota compliance, they may have some problems.”

The deferral of tougher output restraints suggests Riyadh and its Gulf neighbors Kuwait and the United Arab Emirates want to be sure that others in the 12-member cartel are sharing the burden of the reductions.

Naimi said that Saudi Arabia’s compliance with its share of the combined 2 million barrels a day (bpd) of cuts agreed in September and October was “very high.”

But Saudi-owned al-Hayat newspaper quoted an OPEC source as blaming a lack of restraint by some countries for having a negative effect on oil prices.

One delegate identified Iran as a particular source of concern for Gulf producers.

“Compliance is less than we would like,” said Shokri Ghanem, Libya’s top oil official.


OPEC may need to make larger cuts if it wants to balance the decline in demand among Western economies that has caused inventories to swell to the top of their normal range.

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

Naimi said he would like to see inventory cover among OECD industrialized nations back to 52 days from current levels of 55-56 days of forward demand.

“Some of us cannot sell our crude,” said OPEC President Chakib Khelil.

Evidence so far suggests good if not excellent adherence with last month’s 1.5 million bpd cut effective from November 1, OPEC’s biggest one-time cut since the world economy last faltered in 2001. That year OPEC cut output by a total 5 million bpd in four stages, reducing cartel supply by 19 percent.

Tanker-tracking consultancy Petrologistics estimated last week that OPEC output would fall by 1.22 million bpd in November.

But the Petrologistics figures showed that nearly half of that reduction had been shouldered by Saudi Arabia, whereas Riyadh accounts for only a third of OPEC output.

(additional reporting Peg Mackey, Luke Pachymuthu and Will Rasmussen, writing by Richard Mably, editing by Jonathan Leff)


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