OPEC to hold supply steady, oil price where it wants

DUBAI Thu Mar 11, 2010 5:52am EST

DUBAI (Reuters) - OPEC is expected to leave oil output targets unchanged when it meets in Vienna next week, as a price around $80 and hope that a rebounding world economy will burn more fuel override concern about oversupply.

U.S. crude futures traded above $81 a barrel on Wednesday, down a couple of dollars from a 15-month high touched in January. The price has averaged $78 this year, well above the $62 of 2009 and enough to meet the budget needs of most of OPEC.

With revenues rising and the price just above the $70 to $80 range that top producer Saudi Arabia has targeted as fair, there is little reason for OPEC to change course.

"It seems to me that the Saudis think the market is pretty well balanced and the price is in the desired range," said Bill Farren-Price of consultancy Petroleum Policy Intelligence.

"Even if stocks are on the high side I don't expect there to be a change at this meeting. They will defer any decision on supply to later this year."

Many members would have the luxury of running a fiscal surplus this year, in stark contrast to the situation in much of the rest of the world, where governments are facing the huge debts they ran up to nurse economies through recession.

"OPEC will maintain the same production levels," Imad al-Atiqi, a member of Kuwait's Supreme Petroleum Council, said on Wednesday, with prices around the "desired level" of $70 to $80 a barrel.

Weakness in physical oil markets would remain a concern for oil ministers, and they were likely to repeat the call made in previous meetings for members to improve their adherence to existing supply curbs to help address oversupply.

"There is too much oil on the market," said Sadad al-Husseini, a former top official at state oil giant Saudi Aramco. "But you can't really drop quotas when quotas are so far below what they are actually producing."

High prices have encouraged OPEC to quietly increase output, regardless of targets. The group pumped at a 14-month high in February, according to a Reuters survey.

Oil inventories have fallen as cold winter weather has encouraged fuel use. But inventories in developed countries remain above their historic average and stand at around 58 days, 6 days more than OPEC's preferred levels.

The group is hoping recovering demand in the second half of the year would mop up inventories and absorb higher supply.

"The economy is improving," said one OPEC delegate. "Of course, we say so with a lot of caution. But demand is growing, and the numbers are certainly better than last year."

The second quarter is typically the period of slowest demand, so OPEC will be hoping investors in oil futures continue to focus for a few months more on future economic recovery for price signals rather than current supply and demand fundamentals.

Oil has more than doubled in price since December 2008, buoyed by expectations of economic recovery.

"I don't understand how the oil price is where it is," said a senior trader at an oil major. "If you look at fundamentals it just doesn't make sense."

WHAT IF PRICES RISE?

If oil prices gain much more, OPEC could face a tough dilemma, especially if the group believes that the market is rising as investors bet on future economic growth rather than strong fundamentals.

Producers would have to consider whether to boost supply to cool prices, even if they still saw fundamentals as weak. Saudi Arabia is mindful that high prices could hurt the economic recovery, and also result in long-term demand destruction.

The answer may be to quietly pump more until the group saw concrete signs of increasing demand, said David Kirsch of Washington-based consultancy PFC Energy.

"If demand turns up, there is plenty of additional spare capacity. But in the interim, a bit more creep can be expected from current output levels," Kirsch said.

Chinese demand was expected to drive a rise in global consumption this year, and both OPEC and non-OPEC producers are competing hard for the growing market.

The world's second largest oil consumer imported 4.83 million bpd in February, the second highest daily tally on record.

Russia has begun selling crude into the region through a new pipeline, providing direct competition to Gulf oil producers that have long held a strong grip on the region.

Saudi Arabia cut its April crude selling prices to the region to a 14-month low. Gulf producers have also mostly sold full contracted volumes into the region while maintaining supply curbs elsewhere.

Some question how much more oil China and the region can absorb. Widening spreads between sweet crudes and the heavier more sour crudes being sold into Asia by OPEC producers are an indication of oversupply into the region, traders say.

An issue unlikely to be addressed, but perhaps on the minds of ministers, would be Iraq's plans to boost output capacity to around 12 million bpd from 2.5 million bpd in the next seven years.

Iraq is outside OPEC's quota system after years of sanctions and war, but the group is unlikely to stand by and let it boost capacity so much without pulling the country back into its target system.

(Editing by James Jukwey)

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