OPEC defers move on new oil supply cut

As demand sinks, divisions emerge behind the scenes

CAIRO - OPEC yesterday deferred a decision on a new oil supply cut amid signs that Saudi Arabia and its Gulf allies are demanding tighter adherence to restraints put in place over the past two months.

Gulf producers want to see strict compliance with recent output curbs of 2 million barrels a day before considering further reductions when the Organization of Petroleum Exporting Countries meets in Algeria on Dec. 17.

"The market conditions require us to be 100 percent compliant," said Kuwait's oil minister, Mohammad al-Olaim.

Delegates said ministers discussed how much more they needed to cut in December. Most, including the Gulf producers led by Saudi Arabia, saw a need to slice another 1 million to 1.5 million barrels per day.

But for that to happen, delegates said, Riyadh wants proof that all fellow members are meeting their part of existing curbs.

"We are very concerned about overproduction," said Abdullah al-Attiyah, the Qatari oil minister.

OPEC's first priority is to put a floor under a $90 collapse in oil prices to $55, but Saudi Arabia for the first time in years cited $75 a barrel as a fair price, higher than the current trading value.

US crude was valued at $55 late Friday.

Ali al-Naimi, Saudi oil minister, said oil prices needed to return to $75 to keep the more expensive new projects at the margins of world supply on track.

His comments may come as a relief to consumer nations that are fearful of a return to $100-plus oil.

The Saudi target will serve as a reference point for traders when world oil demand starts to emerge from the current slump.

But for now, the focus is on whether OPEC can prevent prices falling further by avoiding the sort of divisions that have undermined its response to falling prices during previous economic downturns.

Raja Kiwan of consultancy PFC Energy said $75 a barrel does not seem practical in the short term. "Given the fractious nature of OPEC on quota compliance, they may have some problems," he said

Delegates identified Iran and Venezuela, perennial price hawks who have urged quicker cuts, as particular sources of concern on quota compliance.

Venezuela denied the allegation. Iran made no comment.

Petrologistics, a consulting company, estimated last week that, based on shipping data, Iran's production would fall this month by 80,000 barrels per day, much less than the 199,000 barrels it was due to cut.

OPEC is trying to keep any bickering under wraps. Secretary General Abdullah El-Badri said compliance already was "100 percent," and OPEC President Chakib Khelil said members were "fulfilling their commitments."

Early industry estimates show Saudi Arabia and its gulf neighbors making good on their share of OPEC's 2 million barrel per day of cuts since September.

OPEC may have to make larger cuts to balance the rapid decline in demand among Western economies that has caused inventories to swell.

World oil demand is set to contract this year for the first time in 25 years.

"The bottom line is that they need to cut again and they need to cut substantially," said Gary Ross, CEO of the consulting firm PIRA Energy.

"Demand is falling out from beneath them."