OPEC defers new oil cut as divisions emerge

PRICE PRESSURE: OPEC is expected to delay a decision on fresh output cuts until next month. (Getty Images)

OPEC on Saturday deferred a decision on a new oil supply cut amid signs that Saudi Arabia and its Gulf allies are demanding tighter adherence to restraints put in place in the last two months.

Gulf producers want to see strict compliance with recent output curbs of 2 million barrels a day before considering further reductions when the Organization of the Petroleum Exporting Countries meets in Algeria on Dec. 17.

"Compliance I think is OK," said Kuwaiti Oil Minister Mohammad Al-Olaim. "But the market conditions require us to be 100 percent compliant."

Delegates said that ministers discussed how much more they needed to cut in December. Most, including Gulf producers led by Saudi Arabia, saw a requirement to slice another 1 to 1.5 million bpd.

But for that to happen, delegates said, Riyadh wants proof that all fellow members are meeting their part of existing curbs. "We are very concerned about overproduction," said Qatari Oil Minister Abdullah Al-Attiyah.

While OPEC's first priority is to put a floor under a $90-collapse in oil prices to $55, Saudi Arabia for the first time in years identified a "fair" price - $75 a barrel, according to its oil minister, Ali Al-Naimi.

"There is a good logic for $75 a barrel," said Al-Naimi.

"You know why? Because I believe $75 is the price for the marginal producer. If the world needs supply from all sources, we need to protect the price for them. I think $75 is a fair price."

That target will serve as a reference point for traders when world oil demand starts to emerge from the current recessionary slump.

But for now, the oil market is focused on whether OPEC can prevent prices falling further by avoiding the sort of divisions that have undermined its response to falling prices during previous economic downturns.

"$75 a barrel doesn't look doable in the short term," said Raja Kiwan of consultancy PFC Energy. "Given the fractious nature of OPEC on quota compliance, they may have some problems."

Delegates identified Iran and Venezuela, perennial price hawks who have urged quicker cuts, as particular sources of concern on quota compliance.

Venezuela denied the charge. Iran made no comment. But consultants Petrologistics estimated last week that, based on shipping data, Iran's production would fall by 80,000 bpd this month, much less than the 199,000 bpd it is due to cut.

OPEC will want to keep any bickering under wraps. Secretary General Abdullah El-Badri said compliance already was "100 percent" and OPEC President Chakib Khelil said in an official statement that members were "fulfilling their commitments."

Early industry estimates show Saudi Arabia and its Gulf neighbours making good their share of OPEC's 2 million bpd of cuts since September.

Petrologistics data estimated OPEC output falling by 1.22 million bpd in November, with nearly half of that reduction shouldered by Saudi - Riyadh is only responsible for about a third of OPEC output.

OPEC may need to make larger cuts to balance the rapid decline in demand among Western economies that has caused inventories to swell. World oil demand is set to contract this year for the first time in 25 years.

"The bottom line is that they need to cut again and they need to cut substantially," said Gary Ross, CEO of consultancy PIRA Energy. "Demand is falling out from beneath them."

Al-Naimi said he would like to see inventory cover among OECD industrialised nations down to 52 days from current levels of 55-56 days of forward demand, the top of the seasonal norm. OPEC has a mixed record of dealing with downturns in the economy that curb energy demand.

In 2001 it successfully defended prices by removing 5 million bpd in four stages, 19 percent of its supply, laying the foundation for a 6-year boom in oil prices that culminated this summer in a record $147 a barrel.

But in 1997 in Jakarta, at the start of the Asian financial crisis, Saudi pushed through an OPEC increase after Venezuela openly flouted its cartel supply quota by a large margin.

Prices went into a tailspin and US crude hit a low of $10.35 at the end of 1998. (Reuters)

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