Opec might act soon to reduce oil prices

06 May 2011 - 02:27 By Reuters

Opec is considering raising oil output limits when it meets next month to convince the market that it wants to bring down crude-oil prices and reverse the drag of fuel inflation on economic growth.

Despite the loss since late February of Libyan supply, the Organisation of the Petroleum Exporting Countries does not foresee a shortage of crude on world markets, a view supported by comforting data on the state of the global inventory.

But some in the cartel saw the need for a clear signal that Opec is prepared to take action to bring oil back to below $100 a barrel, Opec delegates said.

"Saudi Arabia already made a promise to the US and the rest of the world to keep oil markets well supplied and kept that promise by increasing production above quotas," said a Gulf delegate.

"This doesn't seem to have had an effect on the price, so I think Opec might consider raising production as a psychological factor to help prices come down."

Evidence is mounting that high oil prices are dampening recovery in the West, and in turn holding back fuel demand.

"Opec seems to have resigned from playing an active role in price formation, leaving it up to the market, including speculative players," said Pierre Terzian, of consultancy Petrostrategies.

"In the long run, Opec will be most affected by the effect of high prices on demand."

Leading producer Saudi Arabia has become increasingly frustrated because, despite its unilateral efforts to pump more crude to replace lost Libyan production, prices stayed high, near $120 a barrel for Brent.

Riyadh is among those in the organisation that decided an emergency Opec meeting to discuss the Libyan outage was not warranted, perhaps undermining the cartel's credibility as a cohesive unit.

Last week's intervention by US President Barack Obama, calling for action on fuel prices, was seen by Opec countries as domestic politicking but it put added pressure on those in Opec friendly to Washington, led by Saudi Arabia, to be seen to be doing something.

An increase in formal output could be accompanied by an updating of Opec's system of allocations, or production quotas, to each of its members. The system has not been altered since the end of 2008.

"I think that the Opec quota system is obsolete. An updating of Opec quotas and compliance would certainly improve the credibility of the organisation," said Terzian.

Opec cut quotas sharply from January 1 2009 to combat a drop in demand as recession bit, and has left them unchanged. This has resulted in a large discrepancy between official and actual output.

Saudi Arabia has taken the lead in balancing the market, raising output sharply in February to fill the gap left by the loss of Libyan supplies and cutting it again as global demand eased.

Most of the other Opec members are pumping at or near full capacity. Eleven of them supplied an estimated 25.79million barrels a day last month compared with official limit of 24.84million.

Largely because of the outage in Libya, production from the 11 - excluding Iraq, which is not restricted under Opec's output policy - is still a million barrels a day below its peak of 26.81million barrels a day in January.

Re-establishing Opec quotas at the core of its production policy is not likely to be simple and arguments about who should get what will make it hard to establish realistic quotas for each member country.

That might mean an agreement simply to raise the quota for the group as a whole.