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OPEC considers cutting oil production
(Agencies)
Updated: 2008-09-07 22:08 OPEC has reason to be cautious. Despite their precipitous fall, prices remain 14 percent higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago. Any OPEC move Tuesday to pare back output would send a howl of protest from the US and other major consumers, and give a larger platform to Republican presidential candidate John McCain and Barack Obama, his Democratic counterpart, to call for reduced dependence on foreign oil. Additionally, OPEC understands that high prices drive down demand and will likely try to find a balance between high profits and a price that the market can accept. In a forecast last month, OPEC predicted that the world's forecast appetite for oil for this year overall will have fallen by 30,000 barrels a day and noted that world demand growth next year will be "the lowest since 2002." And on Wednesday, the US Energy Administration reported a 3.5-percent drop for products including gasoline and other oil-based products compared with last year. Such factors have led some experts to predict OPEC would opt for no change. "The ministers will hold the status quo (although) there is going to be the usual jawboning from the usual suspects" for a cutback, says trader analyst Stephen Schork. Even now, "oil is by no means cheap and that is certainly adding a lot of pressure to the (world's) economies --the smarter ones, the Saudis, the Qataris the Kuwaitis are aware of this." Others think that OPEC, which accounts for about 40 percent of world oil production, will compromise between doing nothing --thereby chancing a further erosion in prices --and slashing boldly --thereby risking skyrocketing prices and an ensuing fallback in demand. That middle way would mean agreeing to pare away at overproduction without reducing the overall output quota of 27.3 million barrels a day set in November for the 10 OPEC members under production limits. Energy analyst Catherine Hunter of Global Insight estimates overproduction at between 600,000 and 800,000 barrels a day and says this is the likely "first target of cuts." And because most of the extra production comes from Saudi wells, such a move could be easily accepted by most OPEC members. "Ultimately, OPEC wants to know what the market will bear," she writes in a recent Global Insight analysis, adding that with the world's developed economies expected to perform poorly --and a resulting overspill to East Asian markets --"the answer may well be, not much." Chip Hodge, portfolio manager with MFC Global Investment Management, also thinks that if OPEC issues a call for cuts it will be in overproduction, adding the organization has little additional wiggle room. "Oil prices are still higher than where they were a year ago," he says. "They just don't have much to complain about." |
