OPEC says economy will drive oil output

February 1, 2008 2:43:42 PM PST
OPEC decided Friday to keep pumping oil at present levels. It is a rebuff to Washington and a possible prelude to cutting production as early as next month if the shaky U.S. economy puts a dent in demand.

The decision was taken despite U.S. urging - backed by other major consumers - for more oil on the market to cool prices and relieve inflationary pressures that have contributed to fears of a global economic downturn.

But the 13-nation Organization of Petroleum Exporting Countries would not be swayed from arguments that supplies were adequate and that speculators and geopolitical jitters, not oil availability, were driving the market.

Instead, it focused on near-term expectations: the likelihood of less demand as the Western hemisphere's heating season ends and before its summer driving season begins; the prospect of more barrels both from OPEC and non-OPEC nations; and fears that the market will shrivel if economic woes worsen.

"In view of the current situation, coupled with the projected economic slowdown ... current OPEC production is sufficient to meet expected demand for the first quarter of the year," said a statement summing up Friday's meeting of OPEC oil ministers.

That left open the question of the second quarter - from April to June. And while the ministers avoided discussion of what OPEC's next meeting on March 5 would do, underlying sentiment for reducing output was already apparent.

Expressing concern about the financial crisis in the U.S. and its impact on the world economy in the medium and long term, OPEC President Chakib Khelil told reporters: "It will probably have some impact on demand."

Even before Friday's meeting wound down, Iran's oil minister, Gholam Hussein Nozari, told reporters: "We think there should be cutting in production." And Venezuela, another OPEC price hawk, said it might swing behind Tehran.

U.S. President George W. Bush had led administration lobbying for an increase in output to cool prices. The U.S. response to Friday's decision was measured, however.

"I think everyone is fully aware that having a reliable and steady and predictable supply of oil is a benefit to the global economy," said White House spokesman Tony Fratto.

"We hope that they understand that their decisions on oil production have a real impact on the economy," he said.

Analysts suggested however, that OPEC could soon be pumping less oil rather than more, despite U.S. hopes.

"The likelihood that they will cut in March has just increased based on their rhetoric," said Stephen Schork, whose Schork Report looks at energy markets. "I believe the producers think that the U.S. economy is in recession and they are anticipating a further cutback in demand."

He and others also pointed to lagging U.S. refinery capacity - an argument often used by OPEC in saying refiners cannot process the crude already on the market.

"In the United States last year, we had 30-35 unscheduled outages," said Schork, describing the breakdowns as a "sign of a system that is under mechanical duress."

Rick Chimblo, former head of exploration for Saudi Aramco, the Saudi national oil company, and manager of global business development at Genoil Inc., said the U.S. has not "done anything serious in terms of adding refining capacity ... for nearly 30 years."

OPEC nations, in contrast, plan to expand their refinery output by 6 million barrels a day within three years, not only giving them control over much of the world's crude oil but extending their influence over gasoline, diesel, heating oil and jet fuel, Chimblo said.

Prices dropped below $90 a barrel Friday despite the bullish implications of keeping production steady, after the U.S.

government said employers cut jobs in January, renewing worries that a possible U.S. recession will eat into oil demand.

Light, sweet crude for March delivery lost $1.79 to $89.96 a barrel on the New York Mercantile Exchange.

Though current prices appear to have been factored in by most economies, a natural catastrophe, or a spike in Middle East tensions could again drive prices above $100 a barrel, as they did early this year.

That, in turn, could ultimately achieve the aim of the United States and other major consumers and drive down the cost of oil - but only because their failing economies would not be able to afford as much crude.

Including Iraq, which is not under quotas, total OPEC output is estimated at about 31.5 million barrels a day - about 40 percent of daily world demand, which is believed to be around 85.5 million barrels. The formal OPEC-12 output ceiling is around 30 million barrels a day.

This week's inventory report from the U.S. Energy Department's Energy Information Administration showed that crude and gasoline stocks rose 3.6 million barrels each during the week ended Jan. 25, buttressing OPEC arguments of adequate supply.

But analyst John Hall of John Hall Associates in London said the organization needed to look past its own immediate concerns of maintaining high oil prices.

"If OPEC is concerned about the chances of recession it needs to take whatever action it can take to bring the price down," he said. "All OPEC seems to be saying is, 'if there is a recession, demand will fall way down, and we will need to produce less."'


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