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Thu 15 Mar 2007 03:17 PM

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OPEC set to continue oil output restraint

The oil cartel looks set to keep existing output curbs at today's meeting in Vienna.

OPEC was set to keep existing output curbs at its meeting on Thursday, balancing rapidly declining oil stocks in consumer nations against the risk recent selling in share markets could herald an economic downturn.

OPEC, supplier of over a third of the world's oil, was united on the need to keep output steady, the head of Libya's delegation Shokri Ghanem said ahead of the talks.

He added the emphasis would be on ensuring the 1.7 million barrels per day of cuts, roughly six percent of supplies, agreed at OPEC's previous two meetings were delivered in full.

The oil minister of leading exporter Saudi Arabia, Ali Al-Naimi, backed the view OPEC cuts were achieving their goal in an interview published in al-Hayat newspaper on Thursday.

"The state of the market is comfortable and there is no need to change output," Naimi said.

Some ministers were wary two waves of selling on global equity markets could presage a bigger sell-off that would hurt economic growth and oil demand.

They want to meet again in June.

Stocks wobbled again on Wednesday on concerns over the impact of U.S. home owners falling behind with mortgage payments. But equities and oil rose on Thursday, with U.S. crude up 40 cents at $58.56 at 1027 GMT.

Nigerian Oil Minister Edmund Daukoru said the risks to the oil price were to the downside.

"The market is bearish," he told reporters.

"The global economy is slowing down. China is cooling off, India is cooling off, even the U.S. that is the engine. If you put all the factors together including non-OPEC growth it is bearish so we are looking to implement the full cuts."

Analysts estimate OPEC has made good one million bpd of the pledged reductions. OPEC puts the figure closer to 1.2 million.

"There are downside risks from high interest rates, the weak dollar and the U.S. housing market and loan problems. We need to be vigilant," an OPEC official said.

The International Energy Agency and some analysts believe OPEC may have gone too far with its supply curbs.

According to the IEA, adviser to 26 industrialised countries, OECD countries could be headed for the largest first quarter drop in oil stocks for over 10 years.

"OPEC may have had the impression that the market was oversupplied, but that is no longer the case. In fact we see it as rather undersupplied," IEA Executive Director Claude Mandil told Reuters on Wednesday.

"I think they should soon consider an increase in output."

Even the most conservative projection, OPEC's own, puts demand for OPEC oil at above 30 million bpd this year. That number includes Iraq and new member Angola, both of which are exempt from output restrictions for the time being.

The 10 OPEC members subject to restrictions currently have an output target of 25.8 million bpd.

The oil price is well down on its July 2006 peak of $78.40, but is still almost three times the level at the start of 2002 when Asian demand ignited. OPEC says prices must be sufficiently high to encourage investment without choking economic growth.

"OPEC is trying to balance what clearly looks like a tightening oil market, because of the very sharp inventory reduction we've seen this winter, and the uncertain economic outlook which could undermine future demand," said Gary Ross, CEO of PIRA Energy consultancy.

"They've had remarkable success with their existing policy. Prices are where they want them to be. They don't want prices to run away to the upside but they've also seen how brutal the market can be on the downside."

OPEC scrupulously avoids setting a price target but some ministers have said they believe $60 is a reasonable level for U.S. oil. Others set the bar higher.

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