OPEC to cut production to avoid glut

IrishExaminer.com 22/04/03 By Alex Lawler

OPEC, supplier of a third of the world’s oil, is planning to cut production from its highest level in 18 months to prevent a price slump as demand slows and Iraqi sales near a return to the market.

Saudi Arabia led OPEC’s output higher this year to avert shortages caused by outages in Venezuela and Nigeria and the war-related halt to Iraqi exports. Production is some two million barrels a day more than demand, OPEC ministers said last week.

Crude oil in New York has slid 24% from a 12-year high of $39.99 a barrel in February while the coalition deposed Saddam Hussein in Iraq and seized the country’s oil fields. Faced with a seasonal drop in use, the Organisation of Petroleum Exporting Countries meets Thursday to discuss how to prevent a glut.

“OPEC is pumping an awful lot of oil,” said Steve Thornber, who manages £400 million pounds ($628 million) at Threadneedle Asset Management in London, including BP Plc shares. “If OPEC doesn’t take action or it’s seen as not aggressive enough, you will see a sharp drop in the oil price.”

The group sets quotas to keep prices between $22 and $28 a barrel and some members may be reluctant to lower production because of a need to raise government revenue. It had planned to next meet on June 11 in Doha, Qatar, but called this week’s gathering after prices slid.

In March, OPEC pumped 1.57 million barrels a day more than the target of 24.5 million, almost enough to supply Spain, according to Bloomberg estimates. Of the total, Saudi Arabia pumped 9.2 million barrels a day.

“Some OPEC members will feel Saudi Arabia should take a greater proportion of any cut,” said Paul Spedding, an oil analyst at Dresdner Kleinwort Wasserstein. “The debate is whether Saudi Arabia will agree with that.”

The return of Iraqi supplies will also be a challenge for OPEC. Production may resume from Iraq’s northern fields as early as May, the US military has said. Resuming exports depends on deciding who will sell the oil.

Indonesia will ask OPEC to lower daily oil production by as much as 2 million barrels, the country’s oil minister, Purnomo Yusgiantoro, has said. Venezuela, Qatar, Algeria and Iran have said markets have too much oil, signalling support for a cut.

Oil consumers, including the International Energy Agency, representing 26 industrialised countries, urge caution, saying supplies are needed to replenish inventories. US crude stocks are 14% lower than a year ago and a reduction in output would threaten to bring higher fuel bills at a time of slowing economic growth.

Algeria, OPEC’s third-smallest producer, has called on OPEC members to comply with their targets. In comments that boosted world prices on Thursday, Iran, the second-largest OPEC producer, said any reduction should come from the quotas.

Saudi Arabia has yet to signal its policy. State-owned Saudi Aramco in May will fulfil all oil contracts to customers in Europe, Japan and South Korea, traders said after seeing notices from the oil producer.

Brent crude in London will fall below $20 a barrel in the third quarter from about $25 now if OPEC holds supply near present levels, the CGES said in a report. Should OPEC adhere to the quota, prices will rise to $27.90 next quarter, the group forecast. Iraq will be able to start pumping oil from its northern fields in weeks because of limited damage to installations, the US military has said. Production in the south, where damage is greater, can’t resume for three months.

As a point of protocol, OPEC headquarters invited Saddam’s oil minister to attend Thursday’s meeting. The whereabouts of Amer Rasheed are unknown.

Iraq will send a delegation led by Major General Jawdat al-Obeidi to the group’s meeting Thursday, Reuters reported yesterday, citing an Iraqi opposition official.