Published: Saturday March 14, 2009 MYT 10:11:00 AM
Updated: Saturday March 14, 2009 MYT 10:32:50 AM

Oil prices fall as OPEC faces dilemma on production cut

Opec's dilemma: Slash oil output to boost revenues but risk deepening the world's economic woes?

NEW YORK: As the world's appetite for crude shrinks, OPEC is meeting in Europe to debate whether oil producers should tighten their spigots even more.

On Friday, benchmark crude for April delivery fell 78 cents to settle at $46.25 a barrel on the New York Mercantile Exchange.

In London, Brent prices fell 16 cents to settle at US$44.93 on the ICE Futures exchange.

Some analysts expect the Organization of Petroleum Exporting Countries will agree to additional production cuts beyond the 4.2 million barrels per day that it has already announced.

But those announcements have been met only with indifference in recent months.

OPEC said in December it would slash daily production by more than 2 million barrels.

Yet oil prices fell afterward, tumbling more than 15 percent within three days.

The 12-member group is notorious for cheating on production agreements, and it still hasn't completed previous rounds of cuts from last year.

Meanwhile, oil demand has shriveled up as millions of workers receive pink slips, companies slash spending and manufacturers shutter production plants.

"They're going into this with a lot of uncertainty," Alaron Trading Corp. analyst Phil Flynn said.

"If they're not going to cut production, we'll see oil prices drop back to the low $40s" per barrel.

OPEC ministers sent mixed signals all week about what they'd do, and the price for a barrel of crude lurched between $42 and $47.

Analysts say a reduction of between 500,000 and 1 million barrels a day is likely.

The Obama administration hopes that doesn't happen, and Energy Secretary Steven Chu said he'll lobby OPEC ministers to forgo more production cuts.

Complicating matters, Russia said this week it will send Vice Premier Igor Sechin to the OPEC meeting in Vienna, Austria.

Russia has toyed with the idea of working more closely with OPEC to control the flow of oil to the world.

"It's a big deal" if Russia joins OPEC, analyst and trader Stephen Schork said.

Russia sits on 60 billion barrels of proven oil reserves and if it were a member, it would be OPEC's second-largest producer next to Saudi Arabia, according to the Energy Information Administration.

"The post-9/11 world always took comfort in the division between Russia and OPEC," Schork said.

"Russia didn't take OPEC's marching orders, and that was good for price. But the world has changed."

The huge swing in energy prices, which rocketed above $147 last year before plunging to less than $34 a barrel in recent months, has left oil producers searching for ways to take greater control of the market.

If OPEC calls for a production cut, it will not have a big impact on gasoline costs, analysts say.

Refiners, who have been cutting gasoline output to match the billions of miles no longer being driven by Americans, will have a much bigger role, said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.

"This isn't the year for it," he said.

"The world is broke and it's not using energy."

The Energy Department said earlier in the week that global demand would fall more than expected this year.

And on Friday, two other agencies supported that projection.

The International Energy Agency released its predictions Friday, saying global oil demand in 2009 would drop for a second consecutive year for the first time since 1982-1983.

The IEA cut its forecast for demand this year by 270,000 barrels a day to 84.4 million barrels a day - 1.5 percent lower than a year earlier.

OPEC also lowered its 2009 global demand estimate by 400,000 barrels a day to 84.6 million barrels, 1 million barrels a day less than in 2008.

OPEC expects demand for its own crude to fall by 1.8 million barrels a day on the year, to an average of 29.1 million barrels a day in 2009.

And Friday, the Commerce Department reported that the U.S. trade deficit plunged in January to the lowest level in six years as the economic downturn cut America's demand for imported goods.

The world has much less need for oil now no matter what price it fetches on the market, Flynn said.

"You can get all excited about the future and how things may be, but for now there's still plenty of oil out there," he said.

In other Nymex trading, gasoline for April delivery rose less than a penny to settle at $1.3529 a gallon and heating oil fell 2.92 cents to settle at $1.1972 a gallon.

Natural gas for April delivery fell 6.3 cents to settle at $3.932 per 1,000 cubic feet.

Meanwhile in Vienna: Slash oil output to boost revenues but risk deepening the world's economic woes?

Rarely have OPEC oil ministers faced a tougher choice.

The Organization of the Petroleum Exporting Countries meets in Vienna Sunday, where they could reduce daily production by up to half a million barrels, or do nothing.

OPEC meetings are usually more clear cut. If oil ministers of the 12-nation organization think prices are too low, they decide to crimp output - as they have at the last two meetings.

If oil is too pricey, as was the case less than a year ago, they boost production. And if they are happy, they keep to the status quo.

But desperate times call for more finessed decisions.

This time, the ministers want to bolster prices.

While prices are off their low of around $30 just a few weeks ago, a barrel of crude still fetches less than a third of what it did over the summer.

That is well below the break-even point for producing nations, which could affect not only their national budgets, but oil production as well.

Cheap crude has been one of the few bright spots in a world economy reeling from the financial meltdown that has led to the deepest and most stubborn global recession in decades.

While a substantial output cut could cause prices to spike and increase OPEC revenues, it could prolong economic woes in the U.S. and other major oil consumers.

And such a reduction could not only deepen the perception that OPEC is out for profits, whatever the global costs.

It could ultimately backfire in real terms, by further depressing demand and driving down prices.

"They don't want to be seen as fueling recession further, which is what they're going to be seen as doing if the reduce production more," said London-based analyst John Hall.

But if OPEC can't bring in enough money to expand production, there is a danger of a price spike when the global economy recovers.

Two reports published Friday were expected to support traditional OPEC hard-liners such as Venezuela in their arguments that a further output cut is needed.

At the same time, they served as an indirect warning - drive up prices more and face even less demand in a sputtering global economy that already has cut back on consumption.

The International Energy Agency said world demand would drop for a second consecutive year for the first time since 1982-1983.

In its closely watched monthly survey, the IEA cut its earlier forecast for demand this year by 270,000 barrels a day to 84.4 million barrels a day - 1.5 percent lower than a year earlier.

"The eventual resumption of global demand growth will largely depend upon much stronger economic performance than is currently the case" among the world's biggest energy consumers, said the agency, adding that the latest indicators are "not encouraging."

An OPEC report, meanwhile, noted that demand for oil produced by the cartel - which can supply more than a third of total world output - was expected to fall this year to 29.1 million barrels.

That would be a substantial decline of 1.8 million barrels a day compared to 2008.

Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, said OPEC is in a very bad spot.

"It would be unthinkable that anything can happen at this meeting that would lead to major sort of move in fuel prices, at least the kind of jolts we became accustomed to from 2005 to 2008," Kloza said.

"This isn't the year for it. The world is broke and it's not using energy."

The OPEC meeting comes as the world takes at least a breather from the usual relentless slew of bad news since the financial crisis became most acute last October.

The down Dow Jones industrial average is up around 10 percent and most Asian and European markets also are climbing.

However, governments and investors are wary of calling the end to the downturn.

A failure by the G-20 finance ministers and central bankers to provide a united front at this weekend's meeting in southern England could be one catalyst for a renewed bout of pessimism and market turmoil.

Perceptions of how OPEC acts could affect global equity markets.

Some OPEC ministers are calling for cuts, nonetheless.

"In the short term, we need to reach a base price of $70 a barrel," Venezuela's Rafael Ramirez said on arrival Friday to Vienna, adding OPEC will look at depressed demand, growing inventories and compliance with previous production cuts.

"Evidently there still exists a lot of (excess) production in the market and we are going to meet to discuss how we can drain it," he said, in comments released by Venezuela's oil ministry.

At the same time, he noted that OPEC needed to be "watching the world economic situation very carefully - it has become much worse than anybody ever imagined."

In an even more direct call for cuts, Algerian Energy and Mining Minister Chakib Khelil said OPEC viewed $75 a barrel as a fair price both for consumers and producers.

"If we do not reduce, prices will fall," he said Wednesday.

But continued concern about the world economy - and apparent pressure within OPEC from oil powerhouse Saudi Arabia to eliminate overproduction by individual members such as Iran and Venezuela - suggest the ministers might opt for a small, symbolic cutback; or perhaps none at all.

OPEC cuts agreed on since September were meant to take a daily 4.2 million barrels off the market.

But there is general agreement that the 10 members of the group under production quotas are still overshooting their joint target level of just under 25 million barrels by about 800,000 barrels a day.

A relatively strong comeback in prices may help the Saudis and other Gulf producers make their case.

Prices have rallied from below $35 a barrel last month, with a barrel of benchmark crude fetching over $46 a barrel on the New York Mercantile Exchange Friday.

Earlier in the session, prices peaked at $48.14.

"They're likely to keep the production target at the present level," said Ehsan Ul Haq, chief analyst at Vienna's JBC Energy.

To compensate for overproduction by others, "Saudi Arabia has gone below its production target, and they expect 100 percent compliance from others" before considering cutbacks, he added.

www.opec.org

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