December 10, 2008
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Home / Issue Archive / 2008 / October #10 / OPEC's Khelil: Startle the Market - Stimulate Prices

№ 10 (October 2008)

OPEC's Khelil: Startle the Market - Stimulate Prices

OPEC's President, Chakib Khelil, recently warned of "surprising" cuts to oil output in an effort to stimulates prices. And once again, the cartel has requested compliance from Russia.

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(The China Post) - Oil markets should brace for a surprise decision on output cuts when OPEC meets Dec. 17, the cartel’s president said, suggesting that reductions could be deeper than expected.

“A consensus has formed for a significant reduction of production levels” by the 14-member Organization of Petroleum Exporting Countries, OPEC President Chakib Khelil told The Associated Press on Saturday.

The OPEC head would not discuss how deep the output cut would be, but said it could be “severe,” and noted that some analysts are predicting cuts of as much as 2 million barrels per day.

An output decision that startles markets would help bolster plunging oil rates, Khelil said.

“The best way is to surprise them,” he said. “I hope it (the decision) will.”

Oil prices settled at a four-year low on Friday of US$40.81 a barrel. In July, prices peaked at record highs above US$140 a barrel.

OPEC previously announced a 1.5 million barrel-a-day reduction in October, but the decision failed to halt the fall in prices. Markets have been expecting another cut at the Dec. 17 summit.

“The stronger the decision, the faster prices will pick up,” Khelil said.

He urged oil producers outside OPEC to help the cartel regulate prices, especially Russia, which has said it could sign a cooperation memorandum with the cartel in the Algerian city of Oran.

“We hope that Russia will apply (quota decisions) ... as if it were an OPEC member,” Khelil said.

He acknowledged the cartel has little control over prices at the moment because of the slumping world economy, which has considerably reduced demand for oil.

He pointed out that cartel nations only produce 40 percent of the world’s oil. “The probability that we can adjust supply to demand is very weak,” he said. “In an unstable system, you react by trial and error.”

He said fixing oil output levels has become “a kafkaesque situation” since OPEC wants to maintain its revenue stream without worsening the recession in the U.S. or Europe.

“I really don’t think OPEC wants to hurt the world economy,” he said.

Oil prices that remain too low would start hurting wealthy oil producers, he warned, adding to the global recession. The International Monetary Fund and several stock markets have asked wealthy producers to reinvest some of the cash they piled up when oil was at over US$100 per barrel.

If oil is sold at below production costs, oil-producing nations would have to end their investments abroad and could themselves enter a recession, Khelil warned. “We’d then see a debacle” worldwide, he said.

Oil stability is crucial to a country like Algeria, where oil and natural gas make up 97 percent of exports. Khelil said Algeria based its 2009 budget on oil at US$37 per barrel, but would have to cut back on large infrastructure projects if the price goes lower.

In Baghdad, a senior Iraqi official warned Saturday that current prices are not healthy for Iraq’s economy.

“OPEC needs to take quick action to reduce the offered quantities because the market is oversupplied,” said Falah al-Amiri, head of the state oil marketing arm SOMO.

He said OPEC would adopt “limited cuts” at the Dec. 17 meeting but did not elaborate on the possible amount.

Khelil, meanwhile, expects demand would rise by mid-2009. “It’s certain we’ll see prices rise by that point,” he said.

A fair price for oil would be at “at least US$70” per barrel, the OPEC chief said.

Too-low prices are not in the interest of oil-consuming countries either, he said, because they hinder investment and exploration for future production. He noted that several offshore drilling projects were already being postponed around the world.

“We’ll need these projects to meet demand in two or three years,” he said.

- Copyright 2008, The China Post. All rights reserved. 

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