OPEC to weigh recession risk as well as price

By Barbara Lewis- Analysis

LONDON (Reuters) - A looming global recession could make even aggressive members of OPEC more tolerant of cheaper oil, but the group still needs to cut output by early next year to control swelling stocks and insure against a price collapse.

Already top exporter Saudi Arabia has begun to pare back production in line with expectations of lower demand, which last week pushed oil to a 13-month low below $80 a barrel, nearly 50 percent down from the July peak of $147.27 for U.S. crude.

"'What is the highest price the market can profitably pay?' is the real question," said Serene Gardiner of Standard Chartered Bank.

"Expectations of what oil producers can get for their oil have shifted along with events in the financial world. It's bad for business to add oil to the fire, so to speak. And as such we have noticed a shift in rhetoric."

Ahead of an emergency OPEC meeting called for November 18, Standard Chartered Bank has said the level the exporters' group would "vigorously defend" was $80 a barrel.

That chimes with an OPEC source, who said the Organization of the Petroleum Exporting Countries was unlikely to cut unless the price of crude produced by its members fell below $80 a barrel.

"The price is still reasonable," the source told Reuters.

Saudi Arabia and other Gulf producers can afford to be relatively relaxed. They have low production costs and can balance their budgets with oil at well below $60.

Others including Iran, Venezuela and Iraq need higher prices to meet major spending commitments. Adding to already hefty expenses, Iran has a presidential election to finance next year and Iraq is recovering from years of war.

Venezuela has the greatest needs of all OPEC members and would next year require an average price of $97 to balance its external accounts, according to Washington-based PFC Energy.

"I think we're seeing a re-emergence of the doves and the hawks. Venezuela and Iran would like to see $100 or more and need it," said David Kirsch, consultant at PFC.

"Doves would like to see a level of $90. The difference is that doves are aware that major economies need to enact fiscal and monetary stimuli. They want to ensure the oil price is not so high that it counteracts this."

The categories of doves and hawks are disliked by many in OPEC, but are often used to distinguish between producers like Saudi Arabia, an ally of top consumer the United States, and hawks such as Venezuela and Iran that are more concerned about balancing their books than keeping the top energy user happy.

They are pumping close to capacity, are worried about the falling value of their earnings and think the onus should be on Saudi Arabia, the only OPEC member pumping significantly above its agreed output target, to lead any cuts in production.

ACTION IN SEPTEMBER