Chinese Online Class - OPEC likely to stand pat on output

WORLD / Wall Street Journal Exclusive

OPEC likely to stand pat on output

(WSJ)
Updated: 2006-12-08 16:40

With oil prices back above $60 a barrel and the global economy slowing,
OPEC is likely to refrain from further tightening its oil spigots when
the cartel meets Thursday in Nigeria, according to senior cartel
officials.

But in an indication that oil prices are likely to remain lofty, the
Organization of Petroleum Exporting Countries will be poised to cut
output if needed, with an eye on large stockpiles of crude stored around
the world, these officials said.

Oil prices could still fall in the next few days, and the world's
supply-and-demand balance remains volatile. But barring big moves, cartel
officials said, OPEC probably won't call for a reduction in output when
cartel ministers gather next week in Nigeria's capital, Abuja.

Crude prices fell below $56 a barrel three weeks ago, prompting many
ministers to signal a cut may be in the cards. Such talk has tapered in
recent days as prices have rebounded, reflecting that cuts OPEC announced
in October have begun to register.

Several OPEC officials said the cartel is likely to schedule another
meeting for late January or early February to review output levels. "We
don't have to do anything right now. This is our analysis of the
situation," said a senior official of one major member of the 11-nation
cartel.

Still, oil consumers shouldn't count on much price relief even if OPEC
stands pat on production. The cartel, which meets about a third of the
world demand of 85 million barrels of crude per day, in October called
for a 4.4% reduction in its output. It remains unclear how much has been
cut, but even partial compliance will mean the market is about to feel a
drop in shipments. Some industry analysts say prices could rise next year
because the world will need more oil from the cartel, not less.

OPEC, however, has lately grown obsessed with a fundamental factor in the
oil market: the amount of crude held in commercial inventories in the
U.S. and other major industrialized countries. Those inventories
increased to 2.76 billion barrels at the end of September, equal to 55
days of demand, from 2.64 billion a year ago, or 53 days of demand,
according to the International Energy Agency, the developed world's
energy watchdog.

Several senior OPEC officials said the cartel remains bent on reducing
those inventories and will produce even less oil than the market is
seeking, if needed. OPEC's logic: Fatter stockpiles weaken the cartel's
influence over prices. Instead of buying fresh crude from OPEC, consumers
can get oil from holders of inventory. Many in OPEC say they fear that
overly large inventories could lead to a price crash. A similar dynamic
played out in the late 1990s. Prices fell after a dip in demand during
the Asian financial crisis, then collapsed after oil piled up in storage.

Some industry analysts caution that OPEC may crimp supply too much. Oil
prices slid nearly 25% in the summer, prompting OPEC's cut this fall.
Skeptical at first, oil traders eventually grew convinced the cartel was
pumping and shipping less oil. Benchmark crude-oil futures settled
yesterday at $62.49 a barrel in New York, up 30 cents from the day before
and up 10% from the $56.82 a barrel it reached Oct. 20, the day OPEC met
in Doha, Qatar. Crude had hit a nominal high of $77.03 on July 14.

The global economy may be slowing, but no sharp slowdown appears in the
offing, suggesting strong demand for crude. The International Monetary
Fund expects world economic growth will cool next year to 4.9% from 5.1%
in 2006. OPEC members "now need to be cautious about pushing prices too
high," said Lawrence Goldstein, president of New York-based Petroleum
Industry Research Foundation.

U.S. benchmark crude is expected to average about $66 a barrel this year,
up about $10 a barrel from the average price last year. Some forecasters
predict a similar rise in 2007.

"This market is poised for an increase in prices," said Edward Morse,
chief energy economist at Lehman Brothers, who reckons the world will
need an additional 700,000 barrels a day of OPEC crude in 2007. He is
forecasting an average price well over $70 a barrel next year. "OPEC's
cuts are likely to prove temporary," Mr. Morse said.

The main proponent of targeting inventories is OPEC's top producer and de
facto leader, Saudi Arabia. "We need to take 100 million [barrels of
crude] out of the market" to offset an inventory surplus, Saudi oil
minister Ali Naimi said over the weekend. That figure represents the
increase in industrialized countries' commercial-stockpile levels from a
year ago and represents two days of consumption for the 30 members of the
Organization for Economic Cooperation and Development.

Some analysts have said OPEC may decide on more production cuts as early
as next week in Abuja. But a senior OPEC official suggested the cartel
had no compelling reason to do so now. He said OPEC was likely to wait
until the end of January, when the impact of the October cuts and the
winter inventory drawdowns will clearly show up in the data, to decide
how much oil to pump in the second quarter."We want to see our cuts, and
high winter oil use, bring inventories back to normal levels by the end
of the first quarter," this OPEC official said. "Maybe we won't need to
cut more if stocks come down," he said. But all bets are off, he said, if
prices start spiraling down before OPEC's meeting Thursday.

Because of the long lead times to ship oil from the Middle East to such
markets as the U.S. -- as long as six weeks -- OPEC would have to
implement by February any production changes intended for the second
quarter.

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