OPEC ready to cut more oil to defend price

LONDON (Reuters) - OPEC stands ready to cut yet more oil output at a meeting next month, its fourth reduction since September, to revive prices battered by the first demand drop in more than 20 years.

A cut of around 1 million barrels per day (bpd) could be discussed by the organization's ministers at their March 15 meeting in Vienna, an OPEC source told Reuters.

That would bring announced supply cuts by the Organization of the Petroleum Exporting Countries to 5.2 million bpd, about 6 percent of world demand.

Oil has risen to about $41 a barrel from levels below $34 touched in December, the lowest in more than four years. OPEC officials say the price remains too low to give producers a decent income or encourage investment in new supplies.

"We're coming up to the second quarter when demand will drop even further," said an OPEC delegate, who thought an additional cutback of 1 million bpd was "logical." Consumption typically falls in the northern hemisphere spring as heating demand drops.

"But the big question is the economy. If it starts to revive, or at least does not slow further, it will help demand."

OPEC's president and secretary general in the past week have raised the prospect of the group cutting output further, adding to calls from Venezuela and Iran who are often the first in the group to back action to boost prices.

World demand is expected to fall for a second year in 2009, but some oil consultants believe it will bottom out in the middle of the year. Oil inventories are high, pointing to a supply surplus.

Stocks in the Organization for Economic Co-operation and Development (OECD), a key indicator for OPEC, at the end of November equaled 56.4 days of demand, higher than the 52 days OPEC wants to see.

"The bottom line is the market still wants to see OECD imports and stocks coming down," said Mike Wittner, analyst at Societe Generale.

"So OPEC may decide to cut another 1 million barrels a day when it meets in March -- and that would be a pretty significant cut."

OPEC WORRIED

Most economic indicators remain gloomy. OPEC is among forecasters that expect world oil demand, already expected to contract this year, to weaken further.

"We are really worried about demand, that's why we've cut three times -- and the global economy is still in bad shape," said a senior OPEC delegate.

OPEC has lowered output drastically during past economic downturns, successfully defending prices.

During 2001, it removed 5 million bpd in four stages, 19 percent of its supply -- laying the foundation for a six-year boom in oil prices that climaxed last summer in a record $147.27 a barrel.

Since the current cuts equal 14.5 percent of its supply, there is a historical precedent for it to remove even more oil.

Still, OPEC has to manage expectations, as well as supplies, carefully. Oil prices in recent days have found a floor around $40 a barrel, analysts say, partly as expectations build for more cutbacks.

The group's members still have some way to go in delivering on existing supply curbs of 4.2 million bpd agreed in three stages since September. According to a Reuters survey, they complied with 67 percent of the cutbacks in January.

While OPEC kingpin Saudi Arabia has more than met its commitments, smaller producers such as Angola, Venezuela and Libya have fallen short.

Announcing additional supply restraint if the previous measures have not been fully implemented, could undermine OPEC's credibility.

"Driving a bigger wedge between the targeted cut and the actual production cut may easily be interpreted as unrealistic," said Harry Tchilinguirian, oil analyst at BNP Paribas in London.

"Equally, you are faced with the Catch 22 situation where trying to over-aggressively support the oil price in the current economic context can backfire through more weakness in demand."

(Writing by Alex Lawler, editing by Anthony Barker)