OPEC gears for global recovery

The market is still awash with unwanted crude oil but rising prices mean reductions in supply are unlikely, say ministers.

VIENNA // OPEC is relying on a recovery in the world economy to wipe out an overhang of oil supply, allowing ministers at a policy meeting today to hold back from any more output cuts. Oil prices have almost doubled since hitting a low of US$32.40 in December, reaching a six-month high of $63.45 a barrel on the New York Mercantile Exchange today. The Saudi Arabian oil minister, Ali al Naimi, said the higher prices reflected expectations of a recovery. "The price rise is a function of optimism [that] better things are coming in the future," he told reporters before today's meeting at OPEC headquarters in the Austrian capital. "There are a lot of positives in what I say because I am seeing a recovery." OPEC cut output in three stages last year for a total drop of 4.2 million barrels per day (bpd), equivalent to 5 per cent of world supply. But inventories have continued to rise nonetheless, as demand slumped. US crude oil stocks rose to their highest level in two decades earlier this month, while demand is expected to see its steepest fall in 28 years this year. OPEC's own data show little sign of a recovery yet. One scenario under study by the secretariat suggests that its members should cut by another million barrels a day now to bring inventories back to normal levels by the end of the year. "Certainly the market is oversupplied," said the UAE Minister of Energy, Mohammed al Hamli, declining to say whether he would push for a cut. But the Saudi minister, by far the most influential voice in the 13-member group, said he saw signs of recovery in demand in Asia. He said he was "confident" that prices would reach his target of $75 a barrel by the second half of the year without any further action by OPEC. "There is no need to cut production," he said. "Making another cut now would not help stabilise the market." Politics could also colour OPEC's deliberations, delegates said. Another cut at a time when prices were already above $60 a barrel and the global economy was still in recession would be poorly received in the industrialised world. "It would be politically unacceptable," one delegate said. There were concerns among some delegates that prices could collapse again if fickle sentiment on world markets changed, because brimming stockpiles and weak demand would provide little support. But OPEC could always call an emergency meeting later in the summer if these fears are proven correct. Optimists take heart in the fact that fuel demand traditionally picks up in the second half of the year, when cold weather in the northern hemisphere drives consumption of heating oil. Any recovery in the wider economy could accentuate this seasonal upturn. Raad Alkadiri, an analyst at PFC Energy in Washington, said Saudi Arabia was marking itself out as a price "dove" in contrast to more hawkish members such as Venezuela and Iran. "The Saudis do not want to drive up prices in the short term and threaten a medium-term recovery in demand," said Mr Alkadiri. Saudi Arabia needs oil prices of about $50 a barrel to balance its budget, while the UAE requires closer to $30, according to IMF estimates. Venezuela and Iran, by contrast, need closer to $100. The Venezuelan oil minister, Rafael Ramirez, said there was an oversupply of a million barrels a day that should be removed from global markets. He stopped short of calling for a cut at this meeting, but left no doubt of his government's desire for higher prices. "We are aiming to have an average of $70 this year, and we will work next year to achieve $80 on average," Mr Ramirez said. Mr Alkadiri said Venezuela and Iran were pursuing a policy of higher prices because of budget constraints. "Venezuela and Iran need much higher prices to balance their budgets and for them an increase in revenue is more important than a recovery in the global economy," he said. On a trip to Abu Dhabi earlier this week, the French president Nicolas Sarkozy said he would propose to the Group of Eight richest nations a price band to limit violent swings in the oil market. Mr Ramirez said there was no need for such a mechanism because OPEC was already playing that role. [e-mail]