OPEC mulls cutting crude output by 6 percent to firm up oil prices

Monday, November 12th 2001, 12:00 am
By: News On 6

LONDON (AP) _ With Saudi Arabia now calling for OPEC to cut production, energy analysts say other members of the cartel are sure to agree to tighten their taps to try to reverse the recent slide in oil prices.

Fears of a global recession and dwindling demand for oil will dominate the debate when delegates of the Organization of the Petroleum Exporting Countries meet Wednesday in Vienna, Austria.

Venezuelan President Hugo Chavez told a news conference on the sidelines of the U.N. General Assembly's annual meeting Saturday that the oil cartel's 11 member countries, including Venezuela, have reached a ``definite'' consensus to cut production by at least 1 million barrels per day and perhaps as much as 1.5 million barrels per day.

Several non-OPEC producers have agreed not to hike their production, Chavez said, without naming any countries. Mexico and Norway have publicly demurred, while oil companies in Russia were reported on Friday as willing to trim output at some of their wells.

OPEC, which supplies about a third of the world's oil, has already cut production three times this year. Although demand has continued to weaken, concern that higher prices might intensify the global economic malaise has made OPEC reluctant to cut output again in the aftermath of the Sept. 11 attacks on the United States.

In just the past few days, however, OPEC has become more assertive, with Saudi Arabia, the group's largest and most influential producer, expressing support for a decisive cut of up to 1.5 million barrels a day _ or 6 percent of their official target.

``Saudi Arabia is usually one of the more dovish OPEC members, so if they're calling for one and half million, you can expect that other members will go along,'' said Lawrence Eagles, head of commodity research at London brokerage GNI Ltd.

Expectations of a big cut soared Thursday when Saudi Oil Minister Ali Naimi said a decrease in OPEC's output by 1.5 million barrels, together with a pledge from non-OPEC countries to trim their supplies by 500,000 barrels a day, would be needed to restore balance to world markets.

He dismissed a 1-million barrel-a-day cut as ``a joke,'' and suggested that a cut of 1.5 million barrels a day would be ``an easy option'' for OPEC.

Naimi stressed that OPEC's main goal is to defend oil prices, even if that means losing market share to non-OPEC suppliers.

OPEC has tried to peg the price for its benchmark blend of seven crudes within a range of dlrs 22-28 per barrel. The price of the OPEC benchmark was dlrs 18.51 a barrel on Thursday, the most recent day for which the data was compiled.

The spot month contract for light sweet crude on the New York Mercantile Exchange _ a different, higher benchmark followed by many in the industry _ closed Friday at dlrs 22.22 per barrel.

Saudi Arabia needs to achieve an average benchmark price for the year of at least dlrs 20.70 a barrel to meet its basic budgeted expenditures for 2001. The OPEC benchmark price has tumbled, however, from an average of dlrs 25.70 in the second quarter to an estimated dlrs 18.90 in the fourth, said Leo Drollas, chief economist of the Center for Global Energy Studies in London.

``The worry they have is that the fourth quarter is so bad,'' Drollas said. ``That's what's made them panic. It's suddenly turned very, very bad.''

He added: ``If Saudi Arabia is in trouble, so are the others.''

Iraq, Venezuela and tiny Qatar were the first OPEC members to argue for a decrease in the wake of the latest reduction, which took effect Sept. 1. They called for a cut of around 1 million barrels a day in the group's official output target of 23.2 million barrels a day. The date mentioned for OPEC to make such a cut was Jan. 1.

The idea gained momentum as the economic slowdown intensified. OPEC secretary-general Ali Rodriguez raised the possibility of a reducing output by more than 1 million barrels a day, and support from Saudi Arabia's Naimi made such a move almost inevitable _ and imminent, analysts said.

``Naimi is saying, 'Why wait around? Let's go for Dec. 1,''' said Peter Gignoux, head of the petroleum desk at Salomon Smith Barney in London.

Oil markets already anticipate a 1-million-barrel-a-day decrease in OPEC output. But it's going to take more than that to boost prices back within OPEC's targeted range, Gignoux said.

A cut in the cartel's output of 1.5 million barrels a day, combined with greater self-discipline among OPEC members in not busting their respective quotas, could do the trick, argued Eagles of GNI.

OPEC members are pumping about 800,000 barrels a day above their quotas.