08-10-06

The US Government pleaded with OPEC not to act on its threat to cut oil production by 1 mm bpd. Signals from the cartel that it was planning its first output reduction for two years sent the oil price surging back above $ 60 per barrel and provoked dismay in Washington.
Sam Bodman, the US Energy Secretary, said that he would urge OPEC to reconsider. “We still need oil for sure. We still need all the oil we can get,” he told.

The tumbling crude oil price has caused alarm in the cartel, which has seen the value of its exports fall by 25 % since the crude price peaked in July. OPEC’s “basket” price, an average of the different crude blends sold by OPEC states, has fallen from $ 72 per barrel to $ 54, costing the cartel’s ten members about $ 500 mm (£ 265 mm) a day in lost income.
OPEC ministers are believed to have agreed a cut of 1 mm bpd. The greatest share of the pain, some 300,000 bpd, would be absorbed by Saudi Arabia, the biggest exporter.

However, Edmund Daukoru, the Nigerian Oil Minister and current OPEC president, suggested that no decision had been made to reduce current production of just under 27.8 mm bpd.
“We are still consulting on whether we should have an emergency meeting or not,” he said.

Saudi Arabia’s position is key to the success of any attempt by OPEC to bolster the crude price by reining in production. Demand for Saudi crude and other Gulf blends has dropped sharply owing to a surfeit of stocks in the United States.
Warm weather in the northern hemisphere is slowing the build-up in demand for fuel oil and cargoes of Gulf crude are going begging.

Saudi Aramco, the state oil company, responded by quietly cutting its output by 200,000 bpd over the summer but the Kingdom will need to make even bigger cuts if a 1 mm bpd reduction is to be effective.
Saudi Arabia is torn between the short-term need to support prices and incomes and the long-term requirement to keep OPEC’s product competitive in relation to non-OPEC producers and the burgeoning investment in alternative fuels, such as ethanol and biodiesel.

Without a cut, the cartel members could suffer even greater financial pain, the Centre for Global Energy Studies reckons.
Assuming growth in non-OPEC output of 1.6 mm bpd per day and no OPEC restraint, the Brent crude oil price could fall below $ 50 per barrel by the third quarter of next year. That would mean an average $ 45 price for the OPEC “basket”.