OPEC Preparing Output Cut to Boost Prices After Slump

By Ayesha Daya and Fred Pals

Oct. 24 (Bloomberg) -- The Organization of Petroleum Exporting Countries is preparing to cut oil production for the first time in almost two years to stem a collapse in prices.

Ministers of the 13 nations will gather at 9 a.m. local time in Vienna where Iran and Venezuela, two of the countries most dependent on high prices, will push for reductions.

``Prices should firm up and move higher in the short term'' with a reduction of 1 million to 2 million barrels a day, Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut, said yesterday. ``Unless there is something huge announced, the market will eventually start moving lower again because of the weak economy.''

Crude oil has tumbled 53 percent from a July 11 record of $147.27 a barrel as the financial market crisis spreads, job cuts increase and fuel consumption slows. The International Energy Agency said Oct. 10 that demand among its 28 member nations will fall 2.2 percent this year.

OPEC members have a ``consensus'' on cutting supply, Venezuelan Oil Minister Rafael Ramirez told reporters yesterday in the Austrian capital. An immediate ``substantial'' cut of ``at least'' 1 million barrels a day is needed, Ramirez said.

Iranian Oil Minister Gholamhossein Nozari, representing OPEC's second-largest producer after Saudi Arabia, said yesterday that a 2 million-barrel-a-day cut was necessary because of falling global demand.

``Who said anything about a cut?'' Saudi Arabia's Ali al- Naimi said when asked whether he supports a possible reduction in output. ``Prices will be determined by the market,'' al-Naimi said, declining to elaborate.

Excess Supply

The continuing decline in demand may lead OPEC to discuss a two-step cut, with the second part implemented after OPEC meets again in Algeria in December, ministers from Venezuela and Qatar said. The group's president, Chakib Khelil, said that the OPEC will ``most probably'' lower production and prices between $60 and $90 a barrel won't worsen the global economic slowdown.

``There is an excess of supply definitely, there's an excess of stocks in the market,'' Khelil, who is also Algeria's oil minister, told reporters in Vienna yesterday. ``We have a recession, we have falling demand.''

Tumbling stock markets signal that the financial turmoil may affect emerging markets, the center of oil demand growth. Gross domestic product in China, the world's second-largest energy user, grew 9 percent in the third quarter, the slowest pace in five years.

Target Price

The United Arab Emirates, OPEC's third-biggest producer, is ``very concerned about the steep decline'' in prices, Oil Minister Mohamed al-Hamli said. OPEC pumps more than 40 percent of the world's oil.

Crude oil for December delivery closed at a 16-month low of $66.75 a barrel in New York Oct. 22 as Argentina's seizure of pension funds rattled markets around the world. Oil gained as much as $1.66, or 2.5 percent, to $69.50 in New York today.

``We're talking about how much the cut is going to be and this is what we will discuss at the ministerial meeting tomorrow,'' Kuwaiti minister Mohammad al-Olaim said in an interview after arriving at Vienna airport yesterday.

``Of course we will back a production cut,'' Venezuela's Ramirez said in an interview. ``It is obvious that there is consensus within OPEC nations that we need to cut immediately this year and evaluate in December to see if there's need for a cut in early 2009.''

The group may discuss reinstituting a target price range to defend oil at between $80 and $100 a barrel, Ramirez said. OPEC years ago abandoned an earlier ``price band'' of $22 to $28.

Meet Quotas

Crude has declined from its July record as demand for fuel started to stall. U.S. gasoline demand averaged 8.8 million barrels a day over the past four weeks, down 4.3 percent from the same period last year, a government report showed Oct. 22.

The last time OPEC decided to slash quotas was at a December 2006 meeting in Abuja, Nigeria. The 500,000 barrel-a- day cut took effect in February 2007, expanding an earlier reduction agreed in October. The cuts were reversed later in 2007 as oil rallied.

At a meeting last month, OPEC urged greater compliance with existing quotas, saying that would reduce supply by about 500,000 barrels a day. OPEC members excluding Iraq and Indonesia last month pumped 390,000 barrels a day more than their combined quota of 28.8 million barrels a day, according to Bloomberg estimates.

To contact the reporters on this story: Ayesha Daya in Vienna at adaya1@bloomberg.net; Fred Pals in Vienna at fpals@bloomberg.net.