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Tue 26 Feb 2008 09:19 AM

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Opec to curb output on seasonal drop in demand

Cartel will unofficially cut even if formal target remains unchanged, officials say.

Opec to curb output on seasonal drop in demand
OUTPUT CUT: Officials said Opec would at least cut production unofficially due to a seasonal drop in demand. (Getty Images)

A seasonal drop in demand will lead Opec to curb oil shipments unofficially in the short-term, even if it leaves its formal target alone, officials from some producer nations and executives said.

Oil at near $100 a barrel has piled the pressure on Opec to refrain from cutting output when it meets in Vienna on March 5.

"Opec can't cut with oil near $100 - it's a non-starter politically," said a senior western oil executive on Monday.

But demand in April and May was expected to fall because of refinery maintenance in Asia - which receives more than half of the crude exports from top Opec producer Saudi Arabia.

"Some producers - especially in the Gulf - will have to trim back only because customers are in turnaround and can't take it," the oil executive said.

Ministers have said repeatedly they respond to fundamentals of supply and demand. Pumping more oil when the market does not require it will not offset the speculative buying they say has been largely responsible for inflated prices.

"We will not just react to $100 oil," Qatari Oil Minister Abdullah Al-Attiyah told newswire Reuters. "Opec will move when it sees physical demand for its oil."

Tanker tracker Petrologistics said there was evidence Opec was already trimming output.

Opec oil supply was set to fall by 200,000 barrels per day (bpd) in February because of lower output from Saudi Arabia and Iran, the group's second-largest producer, Conrad Gerber of the Geneva-based consultancy said.

"It's a tweaking of the taps ahead of spring," Gerber told Reuters. "But in a tight market with $100 oil, it's not a good sign."

Even so, the 12 Opec members with production targets - all except Iraq - were in February expected to pump more than 400,000 bpd above their target of 29.67 million bpd, according to Petrologistics.

Looking ahead to supply after the March meeting, sources at two major oil companies said they expected Saudi Arabia, Opec's biggest producer, to leave output around steady in April.

But a top Iranian official told Reuters Iran's output could drop by around 200,000 bpd early in the second quarter as many refiners world-wide carry out maintenance.

"If the normal seasonal trend prevails, there will be less demand for oil in the market, so Iran's exports may decline by about 200,000 barrels a day early in the second quarter," Hojjatollah Ghanimifard, international affairs director at the National Iranian Oil Company, said last week.

For March, however, Iran's oil exports will be slightly higher than the roughly 2.45 million bpd shipped in January and February, he said.

Refinery maintenance is typically carried out around April and May when demand for fuel falls following the end of winter.

Apart from the impact of planned maintenance, refiners have reduced activity because product prices have failed to keep up with a rally that has taken unrefined crude above $100 a barrel.

Refining margins have begun to recover. In addition, some commentators say seasonality is not what it was.

"A lot of demand is now coming from non-industrial countries where there is less seasonality, so things don't change so much," one Opec delegate said.

An official at the International Energy Agency (IEA), which represents the interests of consumer countries, said a temporary drop in demand did not mean output should fall.

"We see end-user demand tending to ease in the spring but that does not necessarily mean the market does not require more crude oil in order to replenish inventories," said IEA analyst David Fyfe.

Whatever the case, the producer group will monitor the situation closely and is very likely to call an extraordinary meeting after its ordinary meeting in March, the delegate said. (Reuters)

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