Opec consensus building for cutbacks to prop up prices

London: Consensus is building within Opec on the need to reduce oil output to prevent a supply overhang and prop up prices, analyst PFC Energy said in a report.

The Organisation of Petroleum Exporting Countries meets on Sep-tember 9 in Vienna. The group is pumping more oil than its official output target, largely due to higher output from Saudi Arabia, according to analyst estimates.

Extra Saudi oil and declining demand from slowing economies in the West have helped lower crude prices to around $110 a barrel from a record $147.27 in July, a trend that is worrying some Opec members.

"The focus of debate among Opec ministers gathering next week in Vienna will not be whether there is a need to cut crude oil production, but rather when," analyst David Kirsch wrote in a note, dated Wednesday, for the Washington-based firm.

Distinct possibility

"Though Riyadh will not be 'bullied' into agreeing to a production cut, the near-consensus within the group that some reduction in volumes is needed - either through a formal target cut or just a reduction in 'over-production' - raises the distinct possibility that the final communique in Vienna will announce an output reduction."

According to PFC's supply and demand balances, Opec's current production rate will lead to a 1.4 million barrel-per-day (bpd) crude build in the second half of this year.

To address this, Opec would need to curb actual supply by 600,000 bpd to 700,000 bpd, which would entail lowering its output target by 1 million bpd to 1.2 million bpd, PFC said.

It may make a combination of unofficial and formal supply curbs in coming months, the firm said.

These could start with an unofficial Saudi cutback of 200,000 bpd to 300,000 bpd, and a larger, formal cut by Opec as a whole at its next meeting on Dec-ember 17 in Algeria, PFC said.

Meanwhile, Opec is unlikely to cut supply at this week's meeting in Vienna because of the hurricane season, Goldman Sachs Group Inc Chief Econ-omist Jim O'Neill said.

"It's quite interesting how quickly people are focusing on the idea of them cutting supply," O'Neill said yesterday in an interview with Bloomberg from a conference in Cernobbio, Italy.

He expects "some volatility" with regard to oil prices before this week'smeeting in Vienna, possibly boosting prices in the short-term.

"Given demand destruction, we are going to come down further'' once the meeting is over, he said.