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Thu 16 Jul 2009 02:53 PM

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OPEC still on course to meet oil market challenge

Oil price slide, rise in motor fuel stocks, slackening of output discipline haven't sabotaged OPEC's plans.

OPEC still on course to meet oil market challenge
OPEC MEET: OPEC next meets to consider output policy on Sept. 9.(Getty Images)

A $10-a-barrel price slide, an unseasonable rise in motor fuel stocks and a slackening of output discipline have complicated, but not yet sabotaged, OPEC's quest to push the oil market higher.At its last meeting in May, the Organisation of the Petroleum Exporting Countries was in upbeat mood and the $75-a-barrel level its members have argued is a fair price for consumers and producers emerged as a goal for later this year.

It was very nearly achieved at the end of June when oil hit this year's peak of $73.38. But since July a different mood has swept financial markets, which are now as focused on economic gloom as on embryonic growth.

"Yes, we are concerned," a source close to the Angolan OPEC presidency said. "But we cannot panic. We have to wait until the meeting in September."

OPEC next meets to consider output policy on Sept. 9.

"I doubt OPEC will do anything with things as they are. I think they will emphasise compliance," one OPEC delegate said.

Since September last year, OPEC has pledged to remove 4.2 million barrels per day (bpd) from its production, about 5 percent of world demand, and by March was delivering around 80 percent of the promised curbs.

Regarded as a record level of discipline, it was highly successful in boosting prices from last December's low of $32.40 and many predicted supply and demand would return to balance late this year.

They take a different view now OPEC's output discipline has dropped to roughly 70 percent and sluggish U.S. demand, even at the height of the summer driving season, has allowed inventories to swell.

Expressed as days of forward demand -- a measure closely watched by OPEC -- stocks in developed countries totalled 62.5 days at the end of May, the International Energy Agency said last week.

That compared with 62 days at the end of April and is around 10 days more than OPEC considers comfortable.

"Stocks will probably come down to normal levels some time in the first quarter (of 2010)" said David Kirsch, director of market intelligence services at PFC Energy in Washington.

"About two months ago, we thought probably some time in the fourth quarter."

A weaker market, trading at around $60 for U.S. crude on Thursday, should concentrate minds.

"OPEC is still on the right path, but it is not an easy task and they are going to have to make sure they keep compliance relatively high," said Kirsch.

"With prices coming down, that's going to reduce the incentive of some of the OPEC members to cheat. A price of $75 pulls out a lot more oil than $60 will."

Mike Wittner of Societe Generale also thought OPEC could meet the challenge.

"You only have to look at the past year to see that when it was crunch time, they did respond. OPEC just needs to recognise they are not out of the woods yet."

OPEC has challenges other than its own supply discipline.

Its own forecasts for demand for its oil are very bearish, and earlier this month its mid-term outlook anticipated consumption of its crude would not match the level before last year's financial crash until 2013.

Analysts have taken similar views, arguing the rally to a record near $150 - almost exactly a year ago - permanently destroyed some demand and encouraged the development of alternative fuel sources.

While OPEC in May anticipated the world would be able to cope with $75 a barrel by the end of this year, this month's price fall and weak demand could mean such confidence was premature.

"As we shot up to $70, it started to affect people's pockets," said Lawrence Eagles of J P Morgan.

OPEC could face a struggle to convince itself and the wider world it was on track when it meets in September, he said, but added there was still a lack of supply and demand data to reveal the size of the producer group's task. (Reuters)

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