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Tuesday, December 9, 2008

OPEC needs big supply cut to stem oil's slide

LONDON (Reuters) - OPEC needs to make a large cut in supplies at a meeting next week, its third reduction since September, to prevent further falls in oil prices as world demand slumps due to slowing economies.

The group should cut output by at least 1 million barrels per day (bpd) at the December 17 meeting, OPEC delegates and analysts said. Some suggest the minimum should be 2 million bpd, a cut of 7.3 percent from OPEC's collective output target of 27.3 million bpd.

"The whole world economy is in turmoil," Shokri Ghanem, Libya's top oil official, told Reuters. "We think this needs substantial action."

That may prove a challenge given the signs of a lack of unity among OPEC members that emerged at a meeting last month which put off taking any decision on supply until December.

Since the Cairo meeting, oil has hit a four-year low near $40 a barrel.

Apart from Libya, Iran and Venezuela have also called for the Organization of the Petroleum Exporting Countries to cut output further. But Saudi Arabia, OPEC's top exporter, has yet to publicly back another reduction.

OPEC has implemented two-thirds of a November 1 agreement to cut output by 1.5 million bpd, according to Reuters estimates. At a meeting in September, it decided to lower supplies by about 500,000 bpd.

But analysts and traders say OPEC needs to do more than improve compliance. Nauman Barakat of Macquarie Futures USA said a further cut of more than 2 million bpd was needed. Others expected at least 1 million bpd.

"To do nothing is not an option, that's what we saw last time," said Rob Laughlin, oil analyst at MF Global.

"I'm looking for a 1.0 million-barrel to 1.5 million barrel cut. If they fail to do that, they will lose further confidence in the market."


While OPEC does not have a formal price target, Saudi Arabia's King Abdullah said last month that $75 a barrel was a "fair price" for oil, a view later backed by other OPEC members including Kuwait and Nigeria.

Even so, without a big supply cutback that is swiftly implemented and communicated by OPEC members to their oil buyers, $75 oil may remain more of an aspiration than a reality.

"The problem OPEC faces is one of credibility," said David Hufton of brokers PVM in a report. "They need another cut of 2 million bpd, backed up by full compliance and prompt notice to lifters."

"If OPEC is indecisive and unconvincing on December 17, they risk meeting again in Q1 next year with crude at $30."
OPEC's ability to prop up the market would gain a boost if it secured the cooperation of non-member countries, such as Russia.

Russia, the largest non-OPEC oil exporter, plans to send a senior team to the December 17 meeting in Oran, Algeria. It has worked more closely with OPEC in recent months and agreed to cooperate with the group to study the market.

The Russian delegation in Oran is likely to be accompanied by top executives from state and private oil producers such as Rosneft (ROSN.MM: Quote, Profile, Research, Stock Buzz) or LUKOIL (LKOH.MM: Quote, Profile, Research, Stock Buzz), industry sources said.

LUKOIL executives have been calling on the government to join OPEC to protect budget needs and allow the firm carry on with costly projects, although state officials have said Moscow would keep independent policies.

A pledge from Russia to cut supply, plus 2 million bpd in curbs from OPEC, should help send prices back to $75, Hufton said.

"Support from Russia with a 500,000 bpd cut should ensure that the mission will be accomplished," he said.

1 comment:

BeyondGreen said...

We seriously need to get on with the business of becoming energy independent. While we are doing the happy dance around the pumps with the lower prices OPEC is planning yet more production cuts and will not quit until they achieve their desired price per barrel. The record high prices this past year have done serious damage to our economy and society. WE must move forward with energy independence. It would cost the equivalent of 60 cents a gallon to charge and drive an electric car. If all gasoline cars, trucks, and suv’s instead had plug-in electric drivetrains, the amount of electricity needed to replace gasoline is about equal to the estimated wind energy potential of the state of North Dakota. Why not use some of the billions of stimulus and bailout money to get some alternative energy projects set up on the national level? We could create badly needed new green collar jobs, produce clean cheap energy and reduce our dependence on foreign oil. What a win-win situation this would be for our nation! We have the knowledge, we have the technology, what America lacks is a plan. Jeff Wilson has a new book out that is beyond awesome. The Manhattan Project of 2009 Energy Independence NOW. He walks you through every aspect of oil, what it is used for besides gas, our depletion of it. The worlds increased need ie 3rd world countries becoming more modernized and consuming more. He explains EVERY alternative energy source and what role they can play to replace oil. His research is backed up with hard data and even includes a time frame and proposed legislative agendas to wean America off oil.