OPEC Won't Cut Output Despite Demand Fall
OPEC opted against more cuts in output and in favor of better compliance with existing reductions amid fears that pushing oil prices too high could jeopardize any rebound in the global economy.
The decision at a meeting of ministers Sunday shows the fine line that the Organization of Petroleum Exporting Countries is having to tread as it faces the worst economic crisis since it was created. On the one hand, crude stocks are still high, meaning prices could stay low for months to come. On the other, tightening supply any more could push crude up too high, entrenching the downturn and endangering any economic recovery.
'They would like oil prices to be in the $50-$60 a barrel range, but they know that in the current conditions that it unachievable -- and maybe even undesirable -- for the global economy,' said David Kirsch, an oil analyst at consultancy PFC Energy.
Sunday's meeting came against a backdrop of a fall in oil demand that the International Energy Agency, the Paris-based watchdog, has called 'staggering.'
Most of the major forecasters have been regularly lowering their demand estimates for this year as prospects for the world economy have darkened. The IEA now thinks demand will fall by 1.5 million barrels a day from 2008 -- the steepest annual drop in 25 years.
OPEC's decision comes amid initial signs that the cuts that the cartel has already announced could be working.
OPEC has pledged output reductions of 4.2 million barrels a day since September, some of the biggest cuts in the cartel's nearly 50-year history. The group's members have shown a surprisingly high level of compliance -- around 80%. As a result, U.S. crude inventories are beginning to slip, and oil prices have gradually edged higher from their lows of $32 a barrel in December.
However, much of that was due to Saudi Arabia, OPEC's largest producer and de facto leader, which appears to have shouldered more than its fair share of cuts.
Saudi Arabia clearly feels there is room for better observance by other OPEC members, some of whom have still been producing far in excess of their quotas.
Others agree that greater compliance is needed. 'We felt it was prudent to seek full compliance of our members and to assess how market conditions are in May,' the Qatari oil minister, Abdullah bin Hamad Al Attiyah, told reporters. 'There are very big uncertainties with the global economy, with demand . . . . We have to be active monitoring the market.'
Iran and Kuwait had pushed for more reductions, according to delegates, but Saudi Arabia resisted. OPEC ministers agreed that the goal is for members such as Angola, Iran and Venezuela to remove a further 800,000 barrels a day of production from the market to bring total output into line with existing cuts.
The group agreed to meet again on May 28 to reassess the supply-demand picture. Analysts think there will be many more OPEC gatherings this year as the group wrestles with how to address collapsing demand.
Consuming countries will welcome OPEC's decision. The IEA has said that lower oil prices were the equivalent of a $1 trillion stimulus package to the global economy and warned against any move that would push crude higher.
'The last thing the world's industrial base needs at present is to be thrown further off balance by a sudden surge in fuel input costs,' it said in its latest monthly market report, released on Friday. |
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