OPEC holds output steady as oil price firms

VIENNA Thu Oct 14, 2010 10:46am EDT

OPEC President and Ecuador Oil & Mines Minister Wilson Pastor (L) and OPEC Secretary General Abudllah Al Badri (R) wait a the beginning of an OPEC oil ministers meeting in Vienna October 14, 2010. REUTERS/Heinz-Peter Bader

OPEC President and Ecuador Oil & Mines Minister Wilson Pastor (L) and OPEC Secretary General Abudllah Al Badri (R) wait a the beginning of an OPEC oil ministers meeting in Vienna October 14, 2010.

Credit: Reuters/Heinz-Peter Bader

VIENNA (Reuters) - OPEC on Thursday kept intact a supply policy that has served it well for nearly two years and set aside concern a weak dollar could drive the oil price too high for a fragile world economy.

Ecuador, which holds the rotating presidency of the Organization of the Petroleum Exporting Countries, confirmed the no-change decision and said the group's next conference would be in Quito on December 11.

Earlier a delegate told Reuters the ministers had been "100 percent" in agreement there was no need to change policy.

Oil prices did not react to the widely-expected OPEC news, but held above $83 a barrel, drawing support from a weak dollar, which has stoked buying across commodities.

Although slightly above the $70-$80 price range, which top exporter Saudi Arabia has said is ideal for producers and consumers, the kingdom's oil minister said he was still happy with the market.

"The biggest challenge we have is to keep the oil market as it is today," Saudi Arabian Oil Minister Ali al-Naimi told reporters.

He declined to be drawn on a price level that might endanger economic recovery, but said producers were concerned about a possible slide back into recession.

"I hope we don't have a double dip. Everybody is working very hard to avoid it."

OIL RISES, DOLLAR FALLS

The oil market has gained momentum as heightened expectation of more quantitative easing to stimulate the U.S. economy has weakened the U.S. dollar.

The dollar on Thursday dropped to its lowest this year against a basket of currencies .DXY, making dollar-denominated commodities relatively cheap for holders of other currencies.

So far oil's gains have been relatively modest -- compared with say gold which has hit a series of record highs -- as the dollar impact on oil has been countered by weak market fundamentals of nearly record-high fuel inventories and sluggish demand.

Some analysts say there is a risk of a strong oil rally, while others say the market could drop if a disconnect with supply and demand fundamentals becomes too great.

"There is upside potential in the price, but the risk in the market if demand does not rise in line with prices is for downside potential," said David Kirsch of PFC Energy, who has said there could be a need for an OPEC cut production next year.

Saudi Arabia, which is keen to preserve long-term demand for its extensive reserves and is holder of the bulk of OPEC's spare output capacity, has traditionally stepped in to add more oil if it considers the market is rising too fast.

Others in the group, including Venezuela, Algeria, Iran and Libya, have tended to favor a higher price to meet domestic budgetary needs and have argued a weaker dollar undermines the value of their petrodollars, justifying more costly oil.

Libya's most senior oil official Shokri Ghanem said $75-$85 was acceptable, but he would welcome a higher price.

"As a matter of fact, the terms of trade are going against OPEC because the dollar is getting eroded," he said.

The decision to keep output unchanged still leaves the group plenty of leeway to adjust supplies informally.

Compliance with the record cut of 4.2 million barrels per day (bpd) announced in December 2008 -- when OPEC last formally changed its output policy -- has slipped to 57 percent, according to the latest Reuters assessment.

"We still need to work hard to improve that compliance," OPEC Secretary General Abdullah al-Badri told a news conference.

Ministers can discuss the situation again in the near future.

In addition to their next output policy meeting in Ecuador on December 11, Saudi Arabia is hosting a meeting in Riyadh next week as part of a series of celebrations to mark the 50th anniversary of OPEC, which was founded in September 1960.

(Additional reporting by Jon Hemming and Muriel Boselli; Writing by Barbara Lewis; editing by William Hardy)