Are you sure?

OPEC set to keep output steady after oil price rise

OPEC ministers are expected to make no change to oil supply when they meet in Vienna next week as higher prices ease their concerns about overflowing fuel inventories and the deepest fall in demand for years.

Oil has rallied to a six-month high of more than $60 a barrel this week, almost double last December's low and well above the $50 level top exporter Saudi Arabia has said it could live with to help nurse the world economy back to growth. “Of course no reduction. Definitely. It goes without saying,” Kuwait's Oil Minister Sheikh Ahmad al-Abdullah al-Sabah told Reuters last week.

Leading exporter Saudi Arabia has yet to make any public comment ahead of OPEC's meeting on May 28.

A senior Gulf source said the group would stick to its current targets, but stress the need for full compliance with them.

“It is unlikely that OPEC will change its production ceiling. They will keep it as it is,” the delegate said.

When the Organization of the Petroleum Exporting Countries last met in March, oil prices were below $50, but it called only for better adherence to existing output curbs, rather than making new ones.

Producers say $75 a barrel is needed to encourage investment in new production over the long term, but for now their more pressing concern is the global economy.

Core Gulf OPEC members want any future price rise to be based on sustained demand growth driven by economic strength, rather than on a short-term supply shortage engineered by OPEC.

“For some in OPEC, prices much higher than where they are now are a threat to recovery,” said David Kirsch, director of market intelligence services at PFC Energy in Washington.

“Damaging the recovery would make them look bad. And a core element of the group really wants to see economic recovery that in turn allows demand to recover and bring the price up.”

Sadad al-Husseini, a former top official at state oil giant Saudi Aramco, said the economy and the improved relationship between OPEC and the United States under Barack Obama were still key.

“OPEC is not going to harm that and the global economy by reducing supplies,” he said. “If it ain't broke, don't fix it.”

OPEC delegates speaking anonymously took a similar view.

“I think with the level of prices, nobody is talking about a cut,” said one. “As long as prices remain at or above $55, I don't think they will act.”

But he underlined the need for discipline. Although compliance is still close to record levels, some sources have estimated it has slipped below 80%. OPEC's latest monthly report pegged it at 77%.

OPEC last changed supply targets in December, when it cut a record 2.2 million barrels per day (bpd) as it raced to match plummeting demand for fuel from an economy in recession.

Just after the December OPEC meeting in Algeria, the oil price dropped to $32.40, its lowest since early 2004.

In total, the group that supplies around a third of the world's oil, has pledged to cut 4.2 million bpd -- or around five percent of global supply -- from last September's output levels.

Some OPEC members, including Iran and Venezuela, need higher prices than others to balance their budgets.

Iranian President Mahmoud Ahmadinejad, who faces an election in June, said an oil price of $80-$90 a barrel was appropriate, given the “world's current conditions” and exchange rate fluctuations.

Production estimates show it is the countries that want high prices that are pumping above target as they try to maximize export earnings, leaving others to shoulder the burden of output curbs to support prices.

Iran, Venezuela and also Angola -- current holder of the OPEC presidency -- have questioned the validity of their supply limits.

Venezuela, like Iran, has big social spending plans, while Angola has the issue of foreign operators reluctant to shut in expensive offshore production, as well as its own economic challenges.

Still, OPEC members would want to avoid becoming mired in a debate about how output is divided among members, Husseini said.

“Trying to rejig quotas is very difficult and now is not the right time to fix it,” he said.

Provided the oil price stays firm, OPEC should find it easier to find harmony, but some analysts say the rally is fragile.

Since the March meeting, leading forecasters have revised down their expectations for fuel demand -- notably the International Energy Agency says it expects it to drop by 2.56 million bpd this year.

A fall that deep would be the steepest annual decline since 1981. OPEC's own economists forecast a lesser but still substantial drop of 1.57 million bpd.

At the same time, inventories have increased to the equivalent of 62.4 days of forward supply cover, the most since 1993 according to the IEA and around 10 days more than OPEC considers comfortable. (Reuters)