OPEC to Pump at Near Record Level as High Prices Stunt Growth

By Grant Smith and Ayesha Daya

Sept. 8 (Bloomberg) -- OPEC, the supplier of 40 percent of the world's oil, will probably keep producing at a near record pace as $106-a-barrel crude squeezes the global economy.

``Our position is to leave everything unchanged,'' Ecuador's Energy and Mines Minister Galo Chiriboga told reporters as he arrived at his hotel in Vienna yesterday. ``We believe the market is well supplied.''

The 13-nation Organization of Petroleum Exporting Countries will keep production unchanged at a meeting tomorrow in Vienna, according to 29 of 32 energy analysts surveyed by Bloomberg last week. Iran and Venezuela will urge the group to trim supplies to prevent oil prices retreating below $100 a barrel.

``They want to prevent a build-up of crude stocks, which rules out an increase, but don't want to send prices skyrocketing by announcing a cut,'' said Mike Wittner, head of oil research at Societe Generale SA in London. ``OPEC won't take any formal action.''

Oil has plunged $41 a barrel, or 28 percent, from its record $147.27 on July 11 as economies slowed, the dollar halted a three-year slide against the euro and Hurricane Gustav caused almost no damage to U.S. drilling platforms and refineries. Demand for crude will increase 1 percent in 2009, the slowest growth in seven years, according to an Aug. 15 OPEC forecast.

The OPEC members with quotas produced about 592,000 barrels a day more than their official limit of 29.673 million last month, according to Bloomberg estimates. Iraq has no quota. Output from all 13 members slipped 200,000 barrels a day from July's record.

All the countries except Saudi Arabia are pumping at close to capacity to meet rising demand and compensate for declining supplies from Nigeria and Venezuela.

Trim Supply

While leaving quotas unchanged, the group may curtail production to prevent inventories from swelling, said Adam Sieminski, Deutsche Bank AG's chief energy economist in Washington.

``If prices are rising, they will leave production alone, and if they are falling, they will trim a little,'' he said.

Record oil prices spurred European inflation to 4 percent in July and contributed to the first quarterly contraction in the region's economy since the euro was introduced almost a decade ago. In the U.S., gasoline demand fell for 19 consecutive weeks, according to MasterCard Inc., with fuel now near $3.70 a gallon.

The world economy is ``precariously close'' to a recession in 2009, UBS AG said last month as it cut next year's global growth forecast to 2.9 percent. It considers a 2.5 percent rate as one that is consistent with a recession.

Oil Prices

Oil for October delivery fell for a sixth consecutive session on Sept. 5, dropping $1.66 to $106.23 a barrel on the New York Mercantile Exchange, the lowest settlement price for a contract closest to expiration since April 4.

Oil stockpiles in industrialized nations, excluding government reserves, were above average in July and enough to meet 54 days of demand, according to the International Energy Agency.

The agency's executive director, Nobuo Tanaka, recommended in a Sept. 4 interview in Brussels that OPEC maintain output levels, adding that recent price declines reflect ``the slowdown of the economy.''

``If stocks were ballooning then you could see pressure mounting within the cartel for a cut,'' said Harry Tchilinguirian, senior oil analyst at BNP Paribas SA.

Most of OPEC's extra pumping in the past few months has come from Saudi Arabia, the world's largest oil producer, which raised output by 500,000 barrels a day in June and July to calm markets.

Market Surprise

An OPEC production cut would ``surprise'' the market, Jan Stuart, a global oil economist with UBS Securities LLC, said in a Sept. 5 Bloomberg Radio interview from New York.

``Where Saudi Arabia is in this debate is crucially important; that is your linchpin,'' Stuart said. ``We don't know what the Saudis are ready to defend, and we do know the Saudis are the ones that would have to do most of the production cutting.''

Venezuela and Iran, OPEC's second- and third-largest producers, want the group to consider reducing supply. Venezuelan President Hugo Chavez said on Aug. 27 he considers prices of just over $100 a barrel as ``fair.''

``Returning to quotas does not mean a production cut, it's a return to previous output commitments,'' Iranian OPEC Governor Mohammad Ali Khatibi said in a Sept. 1 telephone interview in Tehran. ``The result will be a decrease in output, but it's different from a cut in the ceiling.''

The group meets again Dec. 17 in Algeria.

To contact the reporter on this story: Grant Smith in Vienna at gsmith52@bloomberg.net; Fred Pals in Vienna at fpals@bloomberg.net