OPEC paves way for higher oil prices

OIL PRICES: Likely to edge higher as OPEC tightens the screw on markets. (Getty Images)

OPEC oil producers are gradually succeeding in tightening the market and oil prices are likely to respond by rallying later this year, oil analysts and economists said on Tuesday.

Cuts in oil production by members of OPEC have already begun to provide a floor for prices, which tumbled from highs of almost $150 a barrel in July last year to lows below $35 barrel in December.

US light crude oil futures for May delivery were trading at around $53 per barrel on Tuesday.

"It is inevitable that the oil market will tighten this year. The only question is when," Ed Morse, managing director of LCM Commodities, told reporters at an industry conference.

OPEC oil producers, most of them dependent on sales of oil to meet their state budgets, have been hit hard by the economic downturn that has reduced oil demand worldwide.

In an attempt to bolster the market, OPEC has promised to cut its oil production by 4.2 million barrels per day (bpd) from its output levels in September, a pledge that most evidence suggests it has already gone a long way towards meeting.

OPEC and most analysts say the grouping has so far implemented around 80 percent of its promised output cut, leaving between 800,000 and 900,000 bpd left to cut.

Richard Jones, IEA deputy executive director, told the conference OPEC's output cuts, together with colder-than-normal winter weather in major markets and the weakness of the dollar "have helped put a floor under the market price."

If OPEC succeeded in meeting fully its production targets, that would remove a significant amount of oil from the market.

"Such a cut would likely tighten the market substantially by June. This could provide further support for prices," he said.

"The market has likely only paused to catch its breath rather than moved into a prolonged period of lower prices."

Jones said oil demand growth would ultimately rebound with most of the increase coming from Asia and the Middle East.

"We expect demand to recover and not before too much longer, even if the growth is likely to be lower than in the previous decade," he said.

Morse said he did not expect oil prices would go back to their previous heights "any time soon" but added that Saudi Arabia, now effectively the swing producer for OPEC, appeared to be in a position to keep oil prices above $40 per barrel.

"The Saudis seem willing to protect $40 and to limit price increases to $50-55 in the short-term, aiming ultimately for $75 a barrel," he said, adding in an answer to reporters' questions: "I think $40 to $75 per barrel is sustainable."

Tamer El Zayat, senior economist, National Commercial Bank in Saudi Arabia, said he expected oil prices to average $50 per barrel this year but added the potential was for prices to go higher from current levels rather than to fall further: "Even more than $100 per barrel is possible."

Jones said the IEA was concerned the fall in oil prices and the credit crunch was limiting investment in oil production, possibly exacerbating future oil price rises.

"Many, including ourselves, are concerned about the potential supply response when demand begins to recover."

"Without continued investment, baseload production will inevitably decline over time and the longer this goes on the more difficult it will be for supply to respond to future increases in demand. It is literally 'use it or lose it'." (Reuters)

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