OPEC Plans Supply Cut as Crude Oil Heads Toward $50

By Grant Smith and Margot Habiby

Oct. 20 (Bloomberg) -- OPEC, the supplier of more than 40 percent of the world's oil, plans to cut output for the first time in almost two years as the worst financial crisis since the 1930s sends crude toward $50 a barrel.

Options contracts to sell oil at $50 by December soared 28- fold in the past two weeks on the New York Mercantile Exchange. Goldman Sachs Group Inc. and Merrill Lynch & Co. analysts say crude, which fell more than 50 percent from a record high in July to a 14-month low last week, may drop another 44 percent should the world economy slip into a recession.

The Organization of Petroleum Exporting Countries, which meets Oct. 24 in Vienna, three weeks earlier than planned, is facing the weakest growth in demand since 1993 just as new fields come on line from Angola to the Gulf of Mexico. Members may cut daily output by as much as 2 million barrels, President Chakib Khelil said yesterday.

``OPEC is going to try to prevent some of the price decline,'' Francisco Blanch, head of global commodities research at Merrill in London, said in a Bloomberg television interview. ``It's going to be very difficult to stem a price fall.''

Options contracts that allow holders to sell 1,000 barrels of oil for $50 each by December closed at $280 on the Nymex on Oct. 17, up from $10 on Oct. 3. Oil rose a second day today, gaining 0.8 percent to $72.45 a barrel at 7:50 a.m. in Singapore.

Budget Pressures

Even at today's prices, Venezuela and Iran, two of the organization's 13 members, may struggle to balance budgets because they rely on energy sales for more than half of their revenue, according to estimates compiled by the U.S. Central Intelligence Agency.

``Some countries like Venezuela and Iran need prices above $80 a barrel,'' said Leo Drollas, deputy director of the Centre for Global Energy Studies, a London-based consulting company. ``The Saudis have a bottom price of about $65 a barrel, but they might go ahead with a cut to keep solidarity within OPEC.''

Gross domestic product in the six-member Gulf Cooperation Council of Saudi Arabia, United Arab Emirates, Kuwait, Oman, Qatar and Bahrain would shrink 25 percent if oil averaged $50 next year, ING Bank NV estimates.

Ministers from Algeria, Libya, Iran and Venezuela already called for a reduction in supplies from the current quota of 28.8 million barrels a day. Khelil, also Algeria's oil minister, said that while there is consensus for a cut, there is no agreement on its size. It may be necessary to make the cuts in two stages to ensure price stability, he told Algerian state television yesterday.

Qatar, Saudi Arabia

Qatari Oil Minister Abdullah bin Hamad al-Attiyah told Al Jazeera TV the cut will likely be 1 million barrels a day, or 14 percent more than his nation pumps. Saudi Arabia, which dominates OPEC proceedings as the group's largest producer, has yet to comment on its intentions.

Attempts to support prices when the Standard & Poor's 500- Index is down 36 percent this year may sour relations between OPEC and its customers. Both U.S. presidential candidates, John McCain and Barack Obama, have called for greater energy independence to limit reliance on foreign oil.

U.K. Prime Minister Gordon Brown described potential supply cuts as ``absolutely scandalous'' on Oct. 17, Agence France- Presse reported.

The world's industrialized economies will expand next year at the slowest pace since 1982, the International Monetary Fund said Oct. 8. Growth will weaken to 0.5 percent in 2009, from 1.5 percent this year, sending U.S. unemployment to its highest level in 16 years, the agency said.

Reducing Estimates

While OPEC already agreed to curb production by observing output quotas after a Sept. 10 meeting to lower supplies by 500,000 barrels a day, members routinely pump more than their allocation, according to data compiled by Bloomberg. Since that session, Credit Suisse Group pared its forecast for oil next year by 32 percent to $75 a barrel. Deutsche Bank AG cut its 2009 assessment by 23 percent to $92.50 on Sept. 29. BNP Paribas SA lowered its outlook by 18 percent to $92.50 on Oct. 10.

At the same time, Exxon Mobil Corp.'s Saxi-Batuque fields off Angola's shore started pumping in August, while BP Plc's Thunder Horse field in the Gulf of Mexico is scheduled to increase supplies by the end of the year. World oil capacity will rise 1.45 million barrels a day in 2009, twice the rate of growth in demand, according to the International Energy Agency.

``Prices could fall as low as $50 a barrel during the fourth quarter if OPEC can't find a way to offset the financial meltdown,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Oil Stocks Plunge

The prospect of OPEC cuts, slowing economic growth and falling prices drove the Dow Jones Europe Stoxx Oil & Gas Index down 25 percent in the past five weeks. Irving, Texas-based Exxon Mobil, the world's biggest oil company, fell 37 percent this year, while The Hague-based Royal Dutch Shell Plc, the second-biggest, lost 33 percent.

OPEC lowered its forecast for demand in 2009 last week, saying consumption will be 450,000 barrels a day less than expected at 87.21 million a day. The Paris-based International Energy Agency shaved its 2009 outlook the previous week and said this year's demand growth of 0.5 percent will be the weakest since 1993.

U.S. motorists are driving less after gasoline pump prices topped $4 a gallon in July. Vehicle-miles traveled on all U.S. roads that month were 3.7 percent lower than a year earlier, Federal Highway Administration data show. Prices fell to an average of $3.21 a gallon last week, according to the Department of Energy.

Output Cut

As demand declined, OPEC trimmed supplies 3.8 percent to 31.8 million barrels a day in September, according to Geneva- based tanker-tracking service PetroLogistics Ltd. Saudi Arabia's volume fell 520,000 barrels a day to 9.18 million, PetroLogistics said.

``This may be OPEC's toughest balancing act in their history,'' said Tetsu Emori, the fund manager at Astmax Co. in Tokyo, Japan's biggest commodities asset manager with $200 million under management. ``By the time OPEC announces a cut, they would be hoping to have seen the bottom of the price.''

The last time OPEC slashed quotas was at a December 2006 meeting in Abuja, Nigeria. That 500,000 barrel-a-day cut took effect in February 2007 and followed an earlier, 1.2 million- barrel reduction in October 2006. Those actions were reversed later in 2007 as prices rallied.

``The situation has gotten dire enough that they're willing to move and even become a topic of conversation'' during the U.S. election campaign, Ronald Smith, chief strategist at Alfa Bank in Moscow, said in a Bloomberg television interview. OPEC will cut by 1 million barrels a day ``at the very minimum'' and potentially ``wait until after the election, then add another million on top of it, or half a million,'' he said.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net; Margot Habiby in Dallas at mhabiby@bloomberg.net.