March 3, 2008

OPEC oil ministers meeting in Vienna this week have, in theory, three options on output: Raise production, cut production, or do nothing at all.

With oil prices holding close to record highs of more than $100/barrel, an output increase would historically be in order for the 13-producer group.

At the same time, however, lower demand forecasts for the second quarter would normally indicate that output should be reined in.

Faced with this dilemma, several OPEC delegates have said ministers are most likely to choose the third option at the March 5 meeting - inaction.

Pressure on OPEC to increase production has been more muted than in January, when US President George W Bush during a visit to OPEC kingpin Saudi Arabia called for additional OPEC oil to help bring prices down.

OPEC ignored that plea, deciding at a February 1 meeting that current targetted output of 29.673 million b/d for the 12 members bound by output pacts--excluding Iraq--was in line with first quarter demand.

Nevertheless, Bush's energy secretary Samuel Bodman said last Thursday that OPEC, in its own interest, should consider boosting supply to bring down crude prices.

"OPEC should carefully look at supply and demand in the marketplace," Bodman told reporters in Washington DC.

US light crude futures, which rocketed to a new all-time high of $103.05/b Friday, were trading around $101.80/b at 1346 GMT March 3.

Libya sees OPEC leaving output unchanged

Libya's top oil official Shokri Ghanem said on arrival in Vienna March 2 that it appeared there would be no change to supply.

"So far we have not made a decision. But it seems that things are going to be as is," said Ghanem in response to questions on arrival in Vienna.

Indonesia also believes the best option is to leave output unchanged and will propose that current targets be maintained despite the high crude prices.

Maizar Rahman, who represents Indonesia on OPEC's board of governors, said Monday that current high oil prices of more than $100/b were not driven by supply and demand but by non-fundamental factors and that in fact world oil markets were oversupplied to the tune of 1.5 million b/d.

"I think the best proposal is to roll over OPEC's current production as oil consumption in the second quarter will be lower. We will propose this thing at OPEC's March 5 meeting," he said.

OPEC output decisions tend to hinge on the position of the group's most powerful producer, Saudi Arabia, whose oil minister Ali Naimi was quoted as saying Sunday that he was heading to Vienna with an open mind.

In a wide-ranging interview with Paris-based newsletter Petrostrategies, Naimi was asked whether he already had an idea of what the oil producer group should do this week.

"No, we don't," he said. "We will go into the meeting with an open mind. We will listen to presentations by the OPEC secretariat. We will compare them with the data we already know and we will follow whatever we consider to be the most convincing. Then, and only then, will we make a decision."

Naimi said that OPEC had come under pressure at its last meeting in February to raise production, but had found no fundamental justification for an increase.

"'Let OPEC increase its production!' That is what we heard on February 1. We looked at the info we have and it definitely did not justify an increase in production," Naimi said.

Saudi Arabia says OPEC not to blame for high price

It was wrong, he said, to blame oil producers, and in particular OPEC, for record high oil prices because there were too many other factors affecting markets.

Naimi said that while there was "genuine demand" for crude oil and growth in the global economy, these did not account for 100% of the price. He could not say whether it was 60% or 70% of the price but "there is definitely a piece of that price that is influenced by the activities of hedge funds or geopolitics ... That's a fact."

OPEC President Chakib Khelil of Algeria said last week the group had two options: either to maintain the current 29.673 million b/d target, which covers 12 members but not Iraq, or to cut supply as demand falls in the second quarter.

Hitherto, the only apparent support for cutting output has come from Venezuela and Iran. But Venezuelan oil minister Rafael Ramirez said on February 29 he would propose OPEC maintain present levels, adding that it was not the fault of producing countries if oil futures traded at $103/barrel.

Iranian oil minister Gholamhossein Nozari said on February 23 that the group normally tended to cut output in the second quarter and that if it was felt that a cut was necessary, Iran would support it. Iran's current position was unclear Monday.

Washington-based consultants PFC Energy noted Friday that some support for the higher prices had come from Ecuador's declaration of force majeure after the temporary closure of a key 360,000 b/d pipeline due to a landslide. Physical market indicators did not support a "rosy outlook" for crude, it said, with rising crude and gasoline inventories in the US signalling a bearish market ahead for refiners.

"Poor refining economics and sizeable gasoline stocks on hand could prompt refiners to delay or moderate returns from maintenance, leading to a lengthier period of lower utilization rates," PFC said.

"Although normally record high prices would call for quota increases, the worsening fundamentals picture argues for a cut," PFC said, adding that OPEC was "likely under the circumstances to leave official targets unchanged."

Naimi, meanwhile, said in the interview with Petrostrategies that he did not believe oil prices would fall below $60-$70/b because the marginal cost of producing alternative fuels would not be profitable below that price.

"I would say if you look at the marginal cost of producing alternative fuels, whether it is biofuels or tar sands, I believe, just looking at the costs, it is probably between $60 and $70," Naimi said.

"Now if you take all the subsidies that go into producing a barrel of biofuels, I doubt that anybody can make money in that business with a price less than $60 or $70. And therefore a line has been drawn below which the price cannot fall," he said.