Opec delays possible cuts

Tamsin Carlisle

• Last Updated: November 29. 2008 9:08PM UAE / November 29. 2008 5:08PM GMT

The Kuwaiti Oil Minister Mohammad al Olaim talks during the Opec meeting in Cairo, Egypt. Amr Nabil / AP

CAIRO // Opec backed away from cutting oil production for the third time in as many months, but has raised expectations that it will announce a substantial reduction next month.

That would be needed if oil prices are to rally nearly 40 per cent to $75 a barrel – the level that Saudi Arabia has identified as “fair”.

Opec president Chakib Khelil said the group would delay further production cuts pending "close scrutiny" of the oil market during the run-up to its Dec 17 meeting in Oran, Algeria.

Mr Khelil said Opec ministers "agreed to take any additional action on
17th of December to balance oil supply and demand and achieve market
stability."

He said that balance between oil supply and demand was a bigger issue for the Opec than the oil price.

Speaking ahead of the emergency meeting of Opec in the Egyptian capital today, Ali al Naimi, the Saudi oil minister, said a recovery in crude prices to $75 was needed to keep oil development projects on track to supply future demand.

It is the first time in years that the world’s leading crude exporter and Opec kingpin has indicated a price target, effectively setting the agenda for the Dec 17 meeting in Algeria of the group that pumps 40 per cent of the world’s oil supply.

“There is a good logic for $75 a barrel,” Mr Naimi said. “If the world needs supply from all sources, we need to protect the price. I think $75 is a fair price.”

Qatar’s energy minister Abdullah al Attiyah agreed that crude prices were too low to sustain investment needed to boost or merely maintain the world’s oil production capacity. “We can all live with $70,” he said. “With this price, we can invest in upstream projects, but below that it will be very difficult.”

Most Opec members rely heavily on oil export revenues as their main source of income. Especially in the Gulf, they have undertaken huge investments worth hundreds of billions of dollars to raise production capacity.

Oil prices have shed about 63 per cent since July, when they peaked above $147 a barrel, severely battering Opec members’ revenues. On Friday, they closed about $54 a barrel on the New York Mercantile Exchange, after dropping below $49 a week earlier.

Crude prices have fallen about 20 per cent in the past month despite Opec’s Oct 24 decision to pull 1.5 million barrels per day (bpd) of production off the market, following a 500,000 bpd production cut in September. The group convened yesterday’s meeting in part to discuss compliance with the lower output quotas, which were supposed to take effect earlier this month.

“Compliance is less than we would like,” said Shokri Ghanem, the head of Libya’s National Oil Corportion.

Despite the Saudi decision to set an oil price target, considerable scepticism remains over Opec’s power to influence the global market in the environment of falling oil demand in developed economies that are sliding into recession.

“There is total confusion” among Opec’s 13 member,” said Fadel Ghiet, the managing director of oil and gas research at Oppenheimer in New York. “These people really have no business model.”

The concern over compliance among key Opec producers, taken together with analysts’ estimates that only about half the announced production cuts have been delivered, suggests the group may be unable to prevent crude prices from falling further in the short term. Even if Opec eventually does cut oil output according to plan, it holds little sway over the global economic factors that drive demand.

Mohammed al Olaim, the Kuwaiti oil minister, said the worldwide economic turmoil had reduced both demand for oil and the price. “We believe that the market is not balanced and available supplies are more than what is needed,” he said.


tcarlisle@thenational.ae