OPEC considers cutting oil production

**LCAS_712** · September 7th, 2008, 08:09 PM

OPEC ministers consider options including output cuts as oil prices fall

VIENNA, Austria (AP) -- With oil prices off nearly 30 percent from their highs of almost $150 a barrel, OPEC oil ministers are considering what was unthinkable just a few weeks ago -- cutting back output to prop up the price of crude.
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No one is predicting much of a cutback -- if any at all. Still, such a move would not even have been thought of with oil prices setting record after record back in July.

But the bull run appears to have paused, if not ended, which means a new look at options for Tuesday's meeting of the 13 ministers at OPEC's Vienna headquarters.

Since crude surged to a record $147.27 a barrel on July 11, it has tumbled by over $40, or more than 27 percent. Back then, OPEC's main concern was pushing back against arguments from the U.S. and other key consumers that an output increase was needed to end rocketing prices. Oil ministers insisted there was adequate supply to meet demand, and blamed speculators and a weak U.S. dollar for crude's stellar rise.

But now, the greenback has strengthened, world demand has decreased due to creaky economies, traders' appetites for commodities have cooled -- and suddenly the market appears to have turned bearish. Oil markets, however, will also be keeping a close eye on Hurricane Ike, which on Sunday was an extremely dangerous Category 3 storm projected to move into the oil-producing Gulf of Mexico after passing over Cuba.

Light, sweet crude for October delivery fell $1.66 to settle at $106.23 a barrel Friday on the New York Mercantile Exchange -- its lowest close since early April.

The downward spiral has led to calls from OPEC price hawk Iran -- the group's second-largest producer -- to reduce output from the nearly 30.5 million barrels a day being pumped last month by the organization's members.

Not far behind is Venezuela. While moderating recent demands for immediate output cuts, Venezuelan Oil Minister Rafael Ramirez has drawn the line at $100 per barrel of oil. Anything below that should serve as a wake-up call for OPEC to tighten the spigots, he says -- sentiment that is shared by other OPEC members.

Still, a major cutback is unlikely without Saudi compliance, and the Saudis -- de-facto OPEC policy setters who are now producing nearly a third of total OPEC output -- have given no hint they favor that option. Saudi Oil Minister Ali Naimi has instead talked about a floor of $80 as the red line for action.

OPEC has reason to be cautious.

Despite their precipitous fall, prices remain 14 percent higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago.

Any OPEC move Tuesday to pare back output would result in a howl of protest from the U.S. and other major consumers, and give a larger platform to Republican presidential candidate John McCain and Barack Obama, his Democratic counterpart, to call for reduced dependence on foreign oil.

Additionally, OPEC understands that high prices drive down demand and will likely try to find a balance between high profits and a price that the market can accept.

In a forecast last month, OPEC predicted that the world's forecast appetite for oil for this year overall will have fallen by 30,000 barrels a day and noted that world demand growth next year will be "the lowest since 2002." And on Wednesday, the U.S Energy Administration reported a 3.5 percent drop for products including gasoline and other oil-based products compared with last year.

Such factors have led some experts to predict OPEC would opt for no change.

"The ministers will hold the status quo (although) there is going to be the usual jawboning from the usual suspects" for a cutback, said oil analyst and trader Stephen Schork. Even now, "oil is by no means cheap and that is certainly adding a lot of pressure to the (world's) economies -- the smarter ones, the Saudis, the Qataris the Kuwaitis are aware of this."

Others think that OPEC, which accounts for about 40 percent of world oil production, will compromise between doing nothing -- thereby chancing a further erosion in prices -- and slashing boldly -- thereby risking skyrocketing prices and an ensuing fallback in demand.

That middle way would mean agreeing to pare away at overproduction without reducing the overall output quota of 27.3 million barrels a day set in November for the 12 OPEC members under production limits.

Energy analyst Catherine Hunter of Global Insight estimates overproduction at between 600,000 and 800,000 barrels a day and says this is the likely "first target of cuts." And because most of the extra production comes from Saudi wells, such a move could be easily accepted by most OPEC members.

"Ultimately, OPEC wants to know what the market will bear," she wrote in a recent analysis, adding that with the world's developed economies expected to perform poorly -- and a resulting overspill to East Asian markets -- "the answer may well be, not much."

Chip Hodge, portfolio manager with MFC Global Investment Management, also thinks that if OPEC issues a call for cuts it will be in overproduction, adding the organization has little additional wiggle room.

"Oil prices are still higher than where they were a year ago," he said. "They just don't have much to complain about."

**Diets17** · September 7th, 2008, 08:12 PM

Oil prices have fell almost 30 percent yet gas prices haven't even dropped 10 percent...makes a lot of sense.

**imported_elp6n** · September 7th, 2008, 08:14 PM

Gas even went up last week as oil dropped daily last week.

**Diets17** · September 7th, 2008, 08:21 PM

Yeah, its unreal. I don't even want to hear about "oil futures" or whatever it is they have said in the past. It's been at least a month since oil prices have fell around 20 percent or more. Shouldn't we have been seeing the effects of that? Now they want to cut production to see if they can get the price to go back up, are you kidding me? I somewhat understand economics, but why would you buy into that? It's there, we have it we just have "produced" it yet so it becomes even more valuable to traders because we are saving it for later? Righhtt.

**BlueWahooChambordDevil** · September 7th, 2008, 08:21 PM

simple solution.......drill alaska and the gulf and tell OPEC to [censored] off

**plantsman** · September 7th, 2008, 08:22 PM

<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: elp6n</div><div class="ubbcode-body">Gas even went up last week as oil dropped daily last week. </div></div>

Wonder what Exxon's profits will be this quarter? Buy lower, sale high still...

**imported_elp6n** · September 7th, 2008, 08:28 PM

I remembered this article from last month.. I read it but I still don't like it

http://www.cnbc.com/id/26071171

Thursday, 7 Aug 2008
Why Aren't Gasoline Prices Falling Faster?
Posted By:Sharon Epperson
Topics:Energy | Economy (Global)
Sectors:Oil and Gas
Oil prices are back up over $120. But that's a sharp decline from July's all-time high over $145. Many drivers watching plummeting oil prices the last few weeks are asking: Why aren't gas prices falling as much?

Here's the answer: It often takes 3-4 weeks to see the move in oil prices impact prices at the pump. It's true that while we have seen oil prices fall over $25 since July 11th, we haven't seen the same kind of dramatic move in gas prices ....yet.

The national average for unleaded gasoline hit a high of $4.11 a gallon back on July 17. Today pump prices are down to $3.85 on average--that's a 6% drop compared to a 17% plunge in oil prices.

Oil hit a fresh three-month low yesterday. The last time oil prices were at $118 in early May, retail gasoline prices were around $3.60 a gallon. Some states, including Oklahoma and Missouri, are there already. While the national average for gas prices may get there eventually, refiners and retail gas station owners have made purchases at much higher prices so they may not be able to bring down their price right away.

But in some regions, gas prices could get down to $3.50 fairly soon. (Barring any major geopolitical or weather event, of course.) Drivers may notice some big variations, though. Even within the same neighborhood, you may see a 20 cent difference in prices depending on what that retailer paid back when wholesale gasoline prices were higher.

So what's the best case scenario - by fall how low can we expect prices to go?

It's always difficult to predict especially since we are in the middle of hurricane season. But by November and December when demand traditionally drops off, the experts I talk to say we can probably expect to see gasoline in the low $3 range.