OPEC likely to trim oil supply as economy slows

By Barbara Lewis and Simon Webb

LONDON/DUBAI (Reuters) - Slower demand, an economic downturn and cheaper oil could convince OPEC it needs to trim supply unofficially, but the producer group is expected to leave public output targets unchanged when it meets next week.

Prices have plunged from a peak of more than $147 a barrel in July after leading oil exporter Saudi Arabia took a unilateral decision to pump at the fastest rate since 1981.

At the same time, demand in top oil consumer the United States fell at the fastest rate since 1982 in the first half of this year and traditional price hawks Iran and Venezuela have raised the prospect of reining in over-supply.

Given the potential for oil stocks to build, the Organization of the Petroleum Exporting Countries (OPEC) will need to cut output at some point this year to prevent a further price fall, said David Kirsch of Washington-based consultancy PFC Energy.

"The question is not whether to cut, but when," said Kirsch. "But... do you want to be taking oil off the market when you are heading into essentially peak demand in the fourth quarter?"

Consensus was building within OPEC, supplier of more than a third of the world's oil, on the need to reduce output, he said.

But with the price still above $100 a barrel, OPEC could be reluctant to risk the political backlash of making a public cut at its meeting late on Tuesday in Vienna.

"This will be a quick meeting, of that I am sure," said one OPEC insider on condition of anonymity. "The most likely outcome will be to roll over formal output quotas."

The clamor for more oil from consumers has abated as the price has fallen, but record fuel costs triggered protests world-wide earlier this year and oil has been one of the top issues in the U.S. election campaign.

Soaring prices meant OPEC members earned almost as much money from oil exports in the first seven months of this year as in the whole of 2007, according to U.S. government data.

"It would be unseemly of OPEC right now to officially cut production," said Adam Sieminski, chief energy economist at Deutsche Bank. "But a quiet understanding to trim back production might be the order of the day."

SAUDI IS KEY

OPEC supply has been rising since May, led by extra production from Saudi Arabia and any call for tighter compliance would apply mostly to the kingdom.

It pledged to pump at 9.7 million barrels per day (bpd) from July, about 750,000 bpd above its target. Some independent assessors have said Saudi never reached 9.7 million bpd, but the kingdom has not confirmed this.

Other OPEC members have very limited spare capacity and are producing much closer to agreed levels.