Opec lays foundation for more decisive action on oil

Dubai/London: Opec's (Organisation of Petroleum Exporting Countries) surprisingly tough output deal lays the foundation for more decisive action to prop up weakened oil markets and it could involve the possible collaboration of leading non-Opec producer Russia.

Until Opec reached agreement in the early hours of September 10, most had anticipated the group would leave production unchanged.

But top oil exporter Saudi Arabia, which before the meeting said the market was fine as it was, put its name to Opec's unanimous decision to throttle back to agreed output levels.

"The agreement was a surprise," said one Opec delegate. "We had all expected there to be no change."

Saudi Oil Minister Ali Al Nuaimi may have decided he had done enough to bring markets back under Opec control, said analyst David Kirsch of PFC Energy.

Tougher task

By agreeing to cut, Saudi Arabia could be earning support ahead of the tougher task of coordinating deeper Opec supply reductions if demand continued to fall, he added.

Already, oil demand in top consumer the United States has dropped at the sharpest rate since the oil shock of the early 1980s. Global financial turmoil has increased the likelihood the slowdown in fuel demand will become even more pronounced.

"The Saudis need the rest of Opec to go along with them in case the downside risks to oil demand do materialise and they have to take additional action," Kirsch said.

"Saudi Arabia is the only country that can add oil when it's needed, so the expectation among members is that they will take it off the market first when demand falls."

Opec's latest monthly report published last week cut its forecast for oil demand growth this year and it said it would monitor consumption closely ahead of the group's next meeting in Algeria in December.

In theory, last week's agreement means Saudi Arabia will cut around half a million barrels per day (bpd) of extra supplies it pledged to pump earlier this year to try to calm prices, which were then heading towards record levels. But the reality is Saudi Arabia can adjust production whenever it sees fit.

Although Al Nuaimi made no public comment after last week's meeting, the Saudi-owned Al Hayat reported in an unsourced article that the kingdom did not intend to cut output unless customer demand fell.

Established policy

That ties in with its established policy of pumping oil to match demand.

In June at an emergency energy meeting in Jeddah, Saudi Arabia announced a unilateral output increase that took its production to 9.7 million bpd. It said it would continue to produce at or above that level for the rest of the year if there was demand from its customers.

Shortly after the June meeting, oil hit an all-time high of $147.27 (Dh541.21) a barrel on July 11. It has since fallen below $100.

Analysts believe Saudi Arabia is relatively comfortable with lower prices, but other Opec members have a greater need for expensive oil, including Venezuela and Iran, who voiced concern before the meeting the market was oversupplied.

At the same time, members pumping near capacity, could be reluctant to cut their output if action beyond removing additional Saudi barrels were considered necessary.

The biggest non-Opec exporter Russia could also be worried about its falling revenues as the oil price drops.

It has long attended Opec meetings as an observer, but made the West sit up and take notice by sending its highest level delegation, headed by influential Deputy Prime Minister Igor Sechin, to the September conference.

Russian Energy Minister Sergei Shatko said last week Moscow would also send a high-level delegation to the December 17 Opec meeting.

Data: Basket averages $109.5 this year

The Opec oil basket has had an average price of $109.54 (Dh402.56) per barrel in 2008, new data shows.

In August, the Opec basket average price fell to $112.41 per barrel from July's $131.22 per barrel, said Opec in its oil market report for September.

In contrast, the official selling price (OSP) of Abu Dhabi crude oil grades averaged $112.69 per barrel in the first eight months of this year, data from the Abu Dhabi National Oil Company (Adnoc) showed. The price of Adnoc's crude grades - Murban, Lower Zakum, Upper Zakum and Umm Shaif averaged $115.93 in August, 17.04 per cent lower than the July average price.

In August, the 13 Opec members' combined crude production averaged 32.50 million barrels per day (bpd). Saudi Arabia was the biggest producer averaging 9.49 million bpd, followed by Iran at 3.96 million bpd, the UAE at 2.61 million bpd, Kuwait at 2.60 million bpd, Iraq at 2.38 million bpd and Venezuela at 2.33 million bpd.

Opec said in 2009, the world oil demand will average 87.7 million bpd, higher than the 86.8 million bpd projected for this year.

Opec also said the world GDP growth is seen falling to 3.7 per cent in 2009.

- Himendra Mohan Kumar, Staff Reporter