Opec set to keep cool despite plunging oil prices
December 5, 2004
By Daniel Rook
Despite a recent plunge in oil prices, Opec producers appear to be in no rush to cut output quotas and markets expect the taps to be left wide open when ministers meet in Cairo this week.
But analysts said officials within the 11-member cartel might lay the groundwork at Friday's meeting for production cuts in the second quarter of next year, when spring arrives in the northern hemisphere.
"The moderates in Opec, who I think still control the organisation, are facing an interesting task," said Deutsche Bank energy analyst Adam Sieminski.
That was, "how do you get the price down from levels that are probably not good from Opec's long-term standpoint while at the same time convincing members to start to rein their production in for the spring?", he said.
Opec has boosted output substantially in recent months in response to unbridled consumption in China and the United States, as well as supply disruptions in Iraq and the Gulf of Mexico and threats to output elsewhere.
The Organization of Petroleum Exporting Countries' current production quota, excluding Iraq, is 27 million barrels per day although its real output, including Iraq, is thought to be closer to 30 million bpd.
Oil prices have now fallen by about a quarter from the record high $55.67 a barrel seen in New York in October -- plunging by 12 percent in just two days last week -- as supply fears faded.
Analysts said that Opec would need to start preparing for a seasonal downturn in demand when spring arrives in the northern hemisphere.
Deborah White at the French bank Societe Generale said Opec could surprise the market by announcing on Friday a reduction in its output ceiling, to take effect at the start of March, or at the latest April.
"Because there have been various conciliatory statements from Opec that they don't see any reason to reduce overproduction, or to reduce quotas in the first quarter, the market is concluding that Opec is not going to address the quota issue at this meeting," she said.
"I disagree. I expect them to announce next week a provisional cut to the quotas, that they will put in place on March 1 next year. The minimum I would expect is a million barrels a day."
Fears of a winter supply crunch in the United States during the northern hemisphere winter have eased in recent days thanks to rises in stockpiles of crude oil and heating fuel.
On the demand side, slower economic growth in China and the United States, as well as the negative impact of high prices, means that consumption is likely to slow down next year.
"Demand will grow less next year than it did this year, presumably, with China slowing down and the rest of the world's economy slowing as well," said Sieminski.
"Non-Opec supply on the back of these very robust prices should do pretty well, so I think that Opec is not going to get as much growth in its share as it has in the past two years. That's why we think that oil prices are likely to weaken from where they are."
Recent comments from Opec officials suggest that the cartel is in no hurry to announce cuts to production quotas.
"Cutting the production has little chance. The most we can do is to stay at the (current) quota," Opec acting secretary-general Maizar Rahman said at a recent forum in Manila.
He said a cut in production would be "psychologically negative" for the market, adding that Opec did "not want to give the market bad news."
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