Saudi prepares OPEC for massive oil supply cut, fresh hike on cards

The six-strong Gulf Co-operation Council, which on Sunday called on OPEC to ease output, includes cartel members Saudi Arabia, the United Arab Emirates, Kuwait and Qatar. The Gulf Arab OPEC countries already have the support of others in the cartel for production curbs. Iran, Venezuela, Libya and Indonesia have made clear in recent weeks that they too recognise the need for cutbacks ahead of a decline in seasonal demand in the second quarter.

IEA says stocks still low: A Kuwaiti source said price hawk Kuwait would push OPEC for a reduction of between 1.5- 2.0 million barrels per day. The West’s energy watchdog, the International Energy Agency, said speculation over supply cuts would only provoke further volatility in oil prices. "We’re still in an understocked situation in the global market and that creates a very volatile base for these sorts of announcements," said IEA Deputy Director Bill Ramsay.

"Output cuts decided in January won’t feed through into product consumption until May but with 18 inches of snow on the ground in the United States there’s bound to be a psychological reaction." Oil prices have fallen heavily since October when benchmark Brent blend peaked at $35 a barrel, and now are not far from the bottom end of OPEC’s preferred range of $22-$28 for a basket of cartel crudes.

Prices had fallen after last year’s OPEC supply increases began to show up in global inventory data, taking Brent in December below $23 and the OPEC basket below $22. Buoyed by the Saudi statement, Brent on Tuesday rose 98 cents to $24.85 a barrel. An PEC cut of 1.5 million barrels daily would reduce production for the 10 members with quotas, excluding sanctions-bound Iraq, by 5.5 percent to 25.2 million barrels per day.

"According to the data available that is what is needed to balance supply and demand," the Saudi official said. A cut of that size would be enough to reverse more than the last two OPEC output increases of 2000. The cartel raised supply by a combined 3.7 million barrels a day last year, including increments of 800,000 bpd in September and 500,000 bpd in November.

Iraqi output also running lower: OPEC, in control of 40 per cent of world oil supplies, estimated last week that output for 10 members was 26.5 million bpd, already about 200,000 bpd below official quotas of 26.7 million. Iraqi production also has been running at less than half normal rates of 2.3 million bpd with delays caused by Iraqi efforts to regain some leverage over export revenues controlled by the United Nations oil-for-food programme.

If OPEC crudes stay below $22 a barrel, OPEC could announce part of its output increase before ministers meet in Vienna on January 17. Under an informal pact agreed last year, OPEC can order a 500,000 bpd supply reduction if prices stay below $22 for 10 working days. OPEC’s Vienna secretariat said on Tuesday that the basket price for seven days until last Friday had remained below $22.

US oil prices in 2000 averaged $30.20 a barrel, the highest since 1983 and far above the 1999 average of $19.25. The NYMEX settlement of $26.80 on the final trading day of 2000 was up $1.10 from 1999’s last trading day.

But US prices have actually fallen $11 a barrel, or nearly 30 per cent, from the 10-year peak of $37.80 hit in September, partly because the full impact of four production hikes by OPEC in the past year was starting to be felt. On Thursday, the US Department of Energy said US commercial crude oil stocks recorded a year-on-year surplus for the first time in more than 20 months.