Conflicting Signals Mean Tough Call On Production Levels For OPEC

Monday, December 3rd 2007, 10:38 am
By: News On 6

ABU DHABI, United Arab Emirates (AP) _ With oil prices backing away from record levels but nervous traders poised to bid them up, OPEC oil ministers will have a tough call Wednesday on whether to crank up production.

Up to a few days ago, the markets were betting that OPEC decision-makers would opt to increase output at their meeting in Abu Dhabi in attempts to cool red-hot prices that closed at a record $98.18 on Nov. 23 before falling back.

Comments from OPEC members boosted such sentiment. Iraqi Oil Minister Hussein al-Shahristani told Dow Jones Newswires last week that the Organization of Petroleum Exporting Countries will consider another 500,000-barrel-a-day production boost in Abu Dhabi.

Unnamed OPEC officials have told Dow Jones an even higher 750,000 barrel-a-day hike could be in the cards.

Oil prices tumbled in anticipation of such a move, along with fears for the health of the U.S. economy, leaving prices down by nearly $10 by Friday _ the biggest correction ever in nominal terms.

Two days ahead of the OPEC meeting, the price of light, sweet crude for January delivery fell $1.17 to $87.54 a barrel on the New York Mercantile Exchange,

Also pressuring prices downward are reduced demand growth forecasts from both OPEC and the International Energy Agency. And a half-a-million barrel OPEC production hike from last month is starting to kick in, alongside with expectations of increased output from the United Arab Emirates with the end of refinery maintenance there.

Such developments support arguments by key OPEC ministers that the market is well-supplied and has been driven higher by speculation.

Amid the mixed signals, ministers will want to tread carefully _ they remember the disastrous fallout from their decision to raise output just before the 1997 Asian financial crisis only to see oil prices plummet from $20 to $12 a barrel.

Algerian Oil Minister Chakib Khelil said on the weekend that there was ``no need'' to increase output, while Venezuela's oil minister, Rafael Ramirez told reporters: ``We don't see a need to increase oil production ... The market is well supplied.''

Ultimately, OPEC powerhouse Saudi Arabia will call the shots. But Saudi Oil Minister Ali Naimi was noncommittal ahead of the meeting, telling reporters, ``the field is wide open.''

In theory, the ministers could leave production levels of the 10 OPEC countries bound by quotas at an estimated 27.2 million barrels a day. But that would increase pressure from key consumers like the U.S and could stall their economies, resulting in less of a market for OPEC oil.

OPEC's total production is 31.5 million barrels daily, factoring in Iraq and Angola, which are not under output restraints. OPEC oil accounts for about 40 percent of the world's needs.

OPEC also could add another half-a-million barrels a day to its 500,000 barrel boost that took effect Nov. 1, sending a signal that it is receptive to complaints from the top consumers.

Or it could boost production by between 750,000-1 million barrels a day _ a message that OPEC, not speculators, are in charge of markets. Such a boost would also reduce the chances of world recession.

``With oil prices having since receded and comments from some OPEC officials quite noncommittal on what OPEC may or may not do, I think maybe there's just a bit more caution coming into the market,'' said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney.

Johannes Benigni, head of PVM Oil Associates in Vienna, Austria, said ``a decision not to raise outputs would not be a crisis, although a little room to maneuver'' in terms of available supply is always good during the high-demand Western hemisphere winter season.

Still, with markets jumpy _ and OPEC keen to be seen as a responsible regulator _ most analysts are betting on a decision to open the oil spigots wider at Wednesday's one-day meeting.

Analyst John Hall, of John Hall Associates in London, said it was unclear whether demand greater than supply has been driving prices but he expected OPEC to increase output simply because of the ``perception'' that the world is short of oil.

``Everyone is saying 'bring some oil out into the market, and they've been holding off long enough,'' said Hall of the push on OPEC to bring down prices.

He said a decision to increase exports would soothe a market skittish over ``the threat of American attack on Iran, tensions over Syria'' and other Middle East trouble spots, as well as forecasts of cold weather in the U.S. Northwest.

``It just takes one thing to go wrong, and the price goes up,'' he said. ``But the moment OPEC says they will increase output, prices will come down.''