OPEC expected to lean on members to curb excess oil production
OPEC expected to lean on members to curb excess oil production
Bruce Stanley, Associated Press, London
With OPEC pumping far more oil than it agreed to last year, the
cartel is expected to insist this week that members tighten their
taps to help prevent a glut that could send crude prices
tumbling.
But Saudi Arabia - de facto leader of the Organization of
Petroleum Exporting Countries - also will argue that the group
should increase the level of its targeted output, several
analysts said.
That would amount to moving the goal post for OPEC's
production, aligning it more closely with the amount of crude the
group actually is producing.
Together, these seemingly contradictory steps may represent
OPEC's best chances for keeping crude prices stable and within
its desired range of US$22-$28 per barrel when the cartel's oil
ministers meet Dec. 12 in Vienna, Austria.
"It's all to do with credibility. At the moment, when you have
3 million barrels of overproduction, people don't have a whole
lot of faith in the quota system," said Lawrence Eagles, head of
commodity research for London brokerage GNI Ltd.
A possible U.S.-led war with Iraq and the drift toward
revolution in Venezuela complicate the ministers' task.
Iraq has the world's second-biggest oil reserves, and fears
abound that a military campaign against the Baghdad government
would paralyze Iraqi oil exports and, possibly, disrupt shipments
from elsewhere in the Gulf. OPEC member Venezuela, a key source
of crude for the United States, plunged further into turmoil last
week when employees of the national oil company went on strike to
support compatriots calling for the ouster of President Hugo
Chavez.
On Saturday, Chavez acknowledged that the strike has affected
oil production and slowed exports. He indicated he would replace
the board of directors of Petroleos de Venezuela S.A., the
massive Venezuelan oil monopoly.
"Production has already been affected ... and some oil fields
have been closed," Chavez said in the Venezuelan capital,
Caracas.
However, such political risks are out of OPEC's control.
Delegates likely will focus instead on a push-me, pull-you
strategy of curbing excess production while increasing members'
output quotas.
January contracts of light, sweet U.S. crude dropped 28 cents
a barrel Friday to $27.01 in afternoon trading in New York.
Contracts of North Sea Brent crude for January delivery fell 33
cents a barrel to $25.47 in late trading in London.
Estimates of OPEC's overproduction vary, but Eagles' estimate
of 3 million barrels a day is 14 percent more oil than the group
agreed to pump under the target set in December 2001.
Quota-busting is an old habit for OPEC. Although compliance
has improved greatly in recent years, it worsened sharply this
autumn when producers boosted their output to cash in on a price
spike caused by nervousness about a potential war in the Persian
Gulf.
"This is the worst it's been in four years," said Adam
Sieminski, an oil price strategist at Deutsche Bank in London.
OPEC, which produces about one-third of the world's oil, has
an output target of 21.7 million barrels a day.
The group's zeal in pumping more crude threatens to undercut
prices, particularly during the second quarter of next year when
demand for heating oil tends to plummet. It also hurts OPEC's
recently acquired reputation for reliability.
Some cartel members appear to have taken note, and analysts
say OPEC's daily production fell by at least 200,000 barrels from
October to November.
"The specter of a price fall reared its head, and they got
frightened," said Leo Drollas, chief economist for the Center for
Global Energy Studies in London.
By complying more strictly with their individual quotas, OPEC
members will try to cut total production by some 1 million
barrels a day, analysts say.
OPEC can soak up much of its remaining overproduction simply
by raising its output target, an idea Saudi Arabia is said to
have proposed at the group's previous meeting in September. Other
OPEC members demurred then, but some analysts expect the group to
agree this week to increase its target by 1.5 million barrels a
day.
This would reverse a cut OPEC made in its production target at
the start of the year. Such a quota increase would take place on
paper only; no additional barrels would flow to markets.
A boost in quotas and a reduction in daily output would
eliminate 2.5 million barrels a day from current overproduction.
Most analysts agree crude supplies are adequate to meet
current demand.
"We're relatively in balance now, but that's not going to last
as we get out into the first quarter," Deutsche Bank's Sieminski
said.
"Very shortly, there's going to be too much oil in the
market," particularly if tensions recede over Iraq and political
stability returns to Venezuela, he said.
If true, that could mean cheaper gasoline and heating oil for
consumers in the United States and other oil-importing countries.