OPEC faces tough test in maintaining production cuts

OPEC faces tough test in maintaining production cuts

Nadra Saouli, Agence France-Presse, Vienna

Saudi Arabia has pushed OPEC to announce oil production cuts
but it remains to be seen if crises in Iraq and Venezuela keep
the oil cartel from holding to its promises.

Faced with the threat of falling prices for oil, Saudi Arabia
succeeded at an Organization of Petroleum Exporting Countries
meeting in Vienna Thursday in getting the 11-nation cartel to
agree to cut production by setting quotas at levels it expects
member states to respect.

OPEC, notorious for straying from its own quota limits, wants
to take 1.5 to 1.7 million barrels per day (bpd) off the market,
driving down its production to the new overall quota of 23
million bpd.

Saudi Arabia had tried to set similar limits at a previous
OPEC meeting in Osaka, Japan, in September, but ran into
opposition from other Gulf oil states which fought for
maintaining the status quo.

Saudi Arabia, the world's largest oil producer with seven
million bpd, has now got what it wants.

"But the real question is will they respect their
commitments," U.S. oil expert William Edward of the Edwards
Energy Consultant firm, said of the OPEC states.

Qatar Oil Minister Abdullah bin Hamad Al Attiyah said in
Vienna that he was "confident all (OPEC) members will comply"
with the new norms as the cartel is seeking to restore its
credibility, which has suffered because of a lack of discipline
in the past in respecting production limits.

But with countries like Nigeria and Algeria anxious to keep
production high, "it all depends on everyone being committed,"
said Yasser Elguindi, oil analyst for the New-York-based Medley
Global Advisors institute.

One thing pushing towards this is "the fact that we're going
into the first quarter when demand is traditionally lower than
normal," since traders are buying for spring and summer, when
demand in the northern hemisphere for oil is low, Raad Alkadari,
an expert for the Washington-based Petroleum Finance Company
said.

OPEC's final statement after its meeting Thursday showed its
awareness of possible problems when it said "that the relative
strength in current market prices is partially a reflection of
the prevailing political situation."

OPEC President Rilwanu Lukman of Nigeria said the cartel
wanted oil prices to stay in the range of US$22-28 a barrel.

He said that while prices had softened since September, they
had come back recently due to "uncertainty that has been created
by the political tensions in Iraq and, most recently, Venezuela."

This creates the possibility that OPEC states might ratchet up
production to take advantage of higher prices coming from feared
or real shortages from either a general strike in Venezuela that
is paralyzing oil production or from a war in Iraq.

Such overproduction would set the stage for falling prices
once the market had more oil than it could handle.

This is precisely what the Saudis fear.

OPEC states have never cheated on their quotas as much as in
the last quarter of this year, producing almost 2.5 million bpd
over the old quota of 21.7 million bpd after oil prices rose to
$29.

The Saudis remember well what happened in 1998-1999 when OPEC
increased its quotas to match actual production but then fell
victim to overproduction that continued while the Asian economy
faltered due to a financial crisis.

Oil prices fell to $10 a barrel.

An additional cloud on the horizon is that OPEC failed in
Vienna to discuss a new quota system demanded by Algeria, Nigeria
and Venezuela.

These countries are anxious to produce more oil in order to
finance economic development.