The Peak Oil Myth

[ThatHawaiiGuy]

OPEC Faces Steeper Cuts in Output as Stockpiles Rise

DECEMBER 11, 2008, 2:15 P.M. ET


http://online.wsj.com/article/SB122898702731197823.html?mod=googlenews_wsj

By BENOîT FAUCON

LONDON -- A deteriorating global economy and shrinking oil demand have the Organization of Petroleum Exporting Countries poised to cut deeper into production when it meets Wednesday.

Oil prices have fallen since OPEC last met Nov. 29 in Cairo and deferred any more output adjustments until mid-December. Oil futures dropped 25% last week before recouping some losses and trading at $46.70 a barrel Thursday morning.

Meanwhile, fresh data confirm the economic contagion is spreading not only through the U.S. and Europe, but to the emerging Asian economies that had boosted oil prices to records as recently as July.

Analysts now say OPEC ministers gathering in Oran, Algeria, on Wednesday may need to agree to cut production by as much as 2.5 million barrels a day, in addition to roughly two million barrels a day of already-pledged cuts, to convince the oil market that it can balance the market and turn around prices.

Indeed, OPEC Secretary General Abdalla Salem El-Badri said Dec. 1 that the cartel may decide on a "major" output cut when it meets in Algeria.

Some OPEC members may face additional pressure from the world's leading oil producer, Saudi Arabia, to improve compliance with quotas. Furthermore, the producers' group is likely to renew calls for Russia and other non-OPEC producers to join in restricting oil supply, though it is unclear whether they will cooperate.

OPEC countries "will want to hit the market hard and fast," said John Hall, managing director of U.K. consultancy John Hall Associates, who predicted a cut of as much as 2.5 million barrels a day. "They need shock tactics to frighten the markets."

Mr. Hall said OPEC members will need to justify the reduction with inventory numbers, typically the days of oil inventories available to nations that are members of the Organization for Economic Cooperation and Development.

OPEC President Chakib Khelil has said the cartel wants to bring the number down to 52 days. That compares with 56.8 days at the end of October, according to International Energy Agency data released Thursday. Stocks are likely to rise further, the IEA forecast.

Peter Hutton, head of research at NCB Stockbrokers, estimated that OPEC would need to cut 1.8 million barrels a day on average in the first quarter to reduce OECD stocks by three days of forward consumption.

Ehsan Ul-Haq, head of research at Vienna oil consultancy JBC Energy, said OPEC also will put a "lot of emphasis on compliance [with previous cuts] as some countries have been complaining that Iran and Venezuela are not complying fully." The two producers deny that and say they are implementing the cuts.

But "pushing for higher prices will be a challenge given sharply decelerating economic activity," said Harry Tchilinguirian, a senior oil-market analyst at BNP Paribas SA.

Economic indicators have signaled further deterioration since OPEC met Nov. 29, followed by worsening forecasts for oil demand.

The World Bank warned Tuesday that growth in global gross domestic product would slow to 0.9% in 2009 from 2.5% this year, the weakest since records became available in 1970. The organization warned that a deep global recession couldn't be ruled out.

The macroeconomic estimates are being matched by downgraded forecasts for oil demand.

The IEA, in its monthly oil-market report for December, forecast 2008 global oil demand to slide 0.2%, or 200,000 barrels a day, to 85.8 million barrels a day on average. The outlook, published Thursday, represents the first demand contraction since 1983.

But the IEA remains more optimistic about demand next year than many other analysts, forecasting consumption to increase 0.5%, or 400,000 barrels a day, from 2008.

Some non-OPEC oil producers are considering reducing their own production in response to a call by the cartel to join the effort.

Russia will outline its decision on cutting oil production Wednesday, the Interfax news agency said, citing Energy Minister Sergey Shmatko. Mr. Shmatko is expected to attend the OPEC meeting in Algeria as an observer. Russia is the world's largest non-OPEC oil producer and has pledged close cooperation with the group.
—Spencer Swartz contributed to this article.

Write to Benoît Faucon at [e-mail]