Oil prices stable after OPEC meeting

Oil prices have remained at around US$58 a barrel despite the Organisation of Petroleum Exporting Countries' (OPEC) announcement last week to cut its daily production by 5% - a total of 1.2 million barrels per day (mb/d)- in an attempt to fight price falls.

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By  Alexandra Dubsky Published  October 29, 2006

Oil prices have remained at around US$58 a barrel despite the Organisation of Petroleum Exporting Countries' (OPEC) announcement last week to cut its daily production by 5% - a total of 1.2 million barrels per day (mb/d)- in an attempt to fight price falls. Oil prices had reached record heights above US$78 this summer due to the Israel-Hezbollah war and insecurities about Iran’s uranium enrichment, coupled with soaring demand from China and India. Prices however recently dropped more than 25% due to a decline in US energy demand and growing inventories. The OPEC ministers met last Thursday in Doha for an emergency meeting, now argue that the market is “oversupplied”- and that the organisation aims to establish a “fair and equitable price” for crude oil at around US$60 threw the production cut. The cartel also did not rule out further cuts when meeting next time at on December 14 in Abuja, Nigeria. Experts however do not expect that the lower production will heavily influence prices since OPEC is notorious for neglecting their quota- and even with the production cuts inventories remain high. “There are sufficient oil stocks, so even if OPEC cuts supply it will not have a significant effect on the market,” said Tetsu Emori, a commodities strategist at Mitsui Bussan Futures, Tokyo. “They are yet very determined to send out a strong message to the world,” he added. Tobin Gorey, commodity strategist at Commonwealth Bank of Australia, added: “It is rather questionable if they will deliver the cuts.” Last week’s meeting decided to reduce production from today’s 27.5 mb/d to 26.3 mb/d, effective from November 1st. The cut will affect all member states except Iraq. However, the meeting was overshadowed by near farcical scenes, after OPEC’s Nigerian president failed to show up, having missed his flight from Lagos. Nevertheless, ministers agreed that number one producer Saudi Arabia will need to curb down production by 380,000 barrels per day (bpd), followed by Iran with 176,000 bpd and Venezuela with 138,000 bpd. The UAE and Kuwait curt 101,000 bpd and 100,000 bpd respectively, and Qatar will slash 35,000 bpd from its daily output. The UAE Energy Minister Mohammed Bin Dhaen Al-Hamli dismissed claims that OPEC is keen on keeping prices high per se, but said the cartel wants to balance out the market’s demand and supply to provide a reasonable price for both consuming and producing nations. “The secretariat is going to monitor the market until the next meeting in December in Abuja and then take an appropriate decision on possible further production cuts,” he said. To some economists, however, lower oil prices could signal a slowing economy since they signal less energy demand. A report by the investment bank Merrill Lynch states that oil prices fell 25% in the six months before the US recession in 2001. The price decline could not halt the economic slowdown because the decline in crude mirrored less demand, the report says, and therefore a sluggish economy. The International Energy Agency last week predicted that world oil consumption will rise 1.2% this year and 1.7% next year- 10% less than prior forecasts. The slowing US demand is said to be the driver of this new trend, since the Chinese and Indian energy demand continues to soar. Conservation is assumed to play a significant role in that. US consumption of gasoline, which usually grows by more than 1% annually, will this year grow by less than 1%, although the population exceeded 300 million this week. “Consumers have responded to the high prices in the last two years” said Mark Routt, analyst with the US consulter Energy Security Analysis. “Demand will continue to grow, but at a much lower rate.” Some experts believe the meeting could signal the gradual disintegration of OPEC as a cartel.

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