OPEC ministers agreed on Sunday to leave existing output targets unchanged, but promised to enforce those curbs more strictly and said they would meet again at the end of May.
The decision reflected concern for the world economy and a belief production curbs so far have begun to take away some of the over-supply from oil markets, the Organization of the Petroleum Exporting Countries said in a communique after the nearly five-hour conference.
Ministers from the 12-member producers’ club had repeatedly said their focus was better compliance with deals in place since September to lower targets by 4.2 million barrels per day (bpd). OPEC adherence has been estimated at roughly 80% and full compliance would take away up to a million bpd more.
“It makes no sense to propose a cut if previous agreements have not been fulfilled,” Venezuelan Minister of Energy and Petroleum Rafael Ramirez told reporters. Venezuela in the past has been among the first to call for aggressive action to shore up prices.
But ahead of Sunday’s meeting only Algeria had clearly spoken out in favor of another cut, saying the oil market had factored in a reduction of at least 500,000 bpd and prices would fall without further supply restraints. For consumer nations, cheaper oil equates to a huge financial stimulus.
Barack Obama, president of the world’s biggest energy consumer the United States, called Saudi King Abdullah last week. The White House did not disclose the contents of the call, but analysts said the timing was significant.
They predicted leading OPEC producer Saudi Arabia would not want to be seen to be destabilizing the economy ahead of a Group of 20 summit in London in April, to which the kingdom is invited to help seek solutions to the world’s financial crisis.
The International Energy Agency (IEA), which advises consumer countries, in a report on Friday said the OPEC supply curbs already in place were enough to shrink oil stocks in developed nations even though it expected 2009 demand to fall by a million bpd compared with last year.
“I think generally speaking it’s a sensible decision and one that the IEA could welcome given the strains that are being faced by the global economy,” David Fyfe, head of the oil industry and markets division at the IEA, told Reuters. “The last thing we need in the short term in an abrupt surge in oil prices.”
OPEC’s cuts since last September have helped to pull prices up from a low of $32.40 in December. But levels are still just over $100 below last year’s record high of nearly $150 and the group cannot forget the price crash of the late 1990s when oil fell towards $10 a barrel.
Although cheaper oil in the short term can help offset what the OPEC statement referred to as “the worst global economic recession in decades,” OPEC says the risk for the longer term is that it inhibits investment in new production, which will drive the price back up again.
Saudi Arabian Oil Minister Ali al-Naimi echoed comments by King Abdullah last year that a reasonable price for oil was about $75.
“It’s what we have said before. If you want the marginal producers to produce, all the poor guys that are shutting down their wells now, they need something about $70-$75. Everybody would be happy,” Naimi said.
The other big risk as far as OPEC is concerned is that inventories will rise sharply as demand shrinks in line with a seasonal fall off in demand as well as the downturn in economic activity.
Oil inventories are already running at the equivalent of nearly 59 days of forward cover -- compared with the 52 days the producer group considers comfortable. As a precaution, OPEC has called another meeting on May 28 at the group’s headquarters in Vienna.
Analysts predicted the immediate price reaction when the oil market resumes trade would be negative but not necessarily for the longer term. “This will lead to lower prices, but I think the stimulus to the economy will help increase demand for oil down the road,” Phil Flynn of Alaron Trading in Chicago told Reuters. (Reuters)