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OPEC to Crimp Supply to Drive Oil Price, But No Official Cut
AFX News Limited 2/25/2008
URL: http://www.rigzone.com/news/article.asp?a_id=57351

OPEC will continue to restrict supplies to maintain oil prices at elevated levels, but the cartel is unlikely to sanction an official production quota cut at its meeting next week, according to the Centre for Global Energy Studies.

OPEC ministers meet next Wednesday in Vienna to decide on official export quotas for 12 of its members, with oil prices currently sitting close to 100 usd a barrel. While member oil ministers have consistently blamed high oil prices on factors beyond their control rather than a lack of crude in the market, the CGES believes OPEC policies have had a key role in driving prices to current levels.

Analysts at CGES said: "Global stock-cover is as low as it has ever been and oil demand is still growing strongly in the subsidised markets of Asia and the Middle East, where final consumers have not felt the impact of rising oil prices," adding that OPEC aimed to continue to restrict supplies to keep global inventories low.

"This policy was masked somewhat in 2007 by Angola joining the group, but output by the other eleven members dropped last year by 670,000 bpd, causing global stocks to fall by the same amount," the CGES analysts said.

"OPEC brought stock-cover to its low ebb -- its recovery will be delayed if OPEC restricts output."

While some OPEC ministers have mooted a potential output cut due to concerns over a slowing US economy and seasonally lower demand in the second-quarter of the year, the CGES has argued that an official output cut is probably politically unviable for the cartel.

However, it sees key players such as Saudi Arabia, OPEC's most powerful member and the world's number one crude producer, as manipulating supplies to maintain prices at higher levels.

"The CGES has recently calculated that, with production at 9 mln bpd, the Kingdom needs an absolute minimum OPEC Basket price of 62 usd a barrel on average in 2008, broadly similar to that required in both 2006 and 2007."

"This suggests that the Kingdom will follow a similar policy to that adopted in recent years of adjusting the discounts against benchmark crudes for its export grades to choke off or stimulate demand as required," the CGES said in its monthly report, adding that Saudi Arabia had been using this means to vary production levels without officially changing output quotas, acting quietly to reduce the build-up of global inventories to ensure oil prices remain at higher levels.

Some market watchers have argued that US oil demand is slowing, with prices close to record levels and a struggling economy crimping demand.

However, while crude inventories in the world's largest consumer of oil have been building since the beginning of the year, CGES sees this as symptomatic of falling refinery rates, rather than as a result of greater supplies in the market.