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OPEC set to hold supply steady, likes oil price

VIENNA (Reuters) - Oil at well above $70 means OPEC will almost certainly keep existing output cuts in place when it meets in Vienna on Wednesday, although it could seek to tighten compliance with existing targets, ministers and delegates said.

Steam and other emissions are seen coming from funnels at a chemical manufacturing facility in Melbourne, June 24, 2009. REUTERS/Mick Tsikas

“The market is in very good shape, very well supplied, the price is good for everybody, consumers and producers,” Saudi Oil Minister Ali al Naimi said on arrival in Vienna in the early hours of Tuesday.

When asked if he thought OPEC needed to cut output at its meeting set to begin at 9.30 p.m. (1930 GMT) on Wednesday, Naimi said: “With the price ranging between $68 and $73, what else do you want? The price, everybody likes, consumers and producers.”

Oil rose $3 to above $71 a barrel on Tuesday.

OPEC has kept official output targets steady since it announced late last year a record cut of 4.2 million barrels per day from September 2008 production.

But as the oil market has recovered from a low of $32.40 in December -- its weakest in nearly five years -- to this year’s peak of $75 hit in August, it has reduced compliance from a peak of around 80 percent of agreed cuts to less than 70 percent.

The lapsing discipline has contributed to an inventory build that has taken stocks to the equivalent of nearly 62 days of forward cover, according to the International Energy Agency -- around 10 days more than OPEC views as comfortable.

DISCIPLINE

“A major issue will be compliance. It will be discussed and stressed by many countries with the hope others will comply,” a Gulf delegate said.

“The most likely outcome is that they will keep the ceiling and quota unchanged,” he said further “It’s going to be a smooth and easy meeting.”

For some in OPEC high stocks are a greater issue than they are for others, although all members have been pleasantly surprised by a market rally in defiance of bulging inventories.

On his arrival in Vienna, Iran’s newly-appointed Oil Minister Massoud Mirkazemi said the level of oil stocks was high, although he also said the market situation was “getting better than before.”

The price has been buoyed by a wave of confidence across markets, which have begun factoring in economic recovery -- which implies higher fuel demand.

“The wise choice for OPEC is to wait and see whether the improvement in leading economic indicators turns into real demand for oil products over the next few months,” said Francisco Blanch of Banc of America Securities-Merrill Lynch.

When nervousness about the economy ran high earlier in the year, Saudi Arabia said it was at ease with a market around $50, although that was well below the roughly $75 it has said was needed to stimulate investment in new supplies.

The leading exporter has assumed the biggest share of output cuts while discipline from other members, notably from OPEC president Angola, has declined.

The different levels of adherence complicate the task of any new cut, although some analysts have said OPEC might have to address when to reduce supplies even if new curbs will not be agreed this week.

Others have said the amount of inventory and spare capacity is serving to prevent the oil market becoming too strong.

The International Energy Agency has repeatedly said under-investment in energy could lead to price spikes when fuel demand rises, which could knock back nascent economic growth.

Speaking at a conference in Vienna on Tuesday, the IEA’s Chief Economist Fatih Birol said the oil market was stable because Saudi Arabia holds ample spare capacity following the supply curbs.

“In the future, we must be careful to make investments in a timely manner,” he said.

additional reporting by Simon Webb, Henrique Almeida and Alex Lawler. Writing by Barbara Lewis; editing by William Hardy

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