OPEC Considers 1 Million-Barrel Production Cut as Oil Tumbles

By Grant Smith and Mark Shenk

Nov. 26 (Bloomberg) -- OPEC nations, the producers of more than 40 percent of the world’s oil, may cut output for the second time in as many months as recessions in the U.S. and Europe drag oil below $50 a barrel.

The Organization of Petroleum Exporting Countries will likely lower supplies before the end of the year after crude prices tumbled 67 percent, or nearly $100, from July’s record, according to 18 of 21 analysts surveyed by Bloomberg. Twelve of the people surveyed predicted the reduction will be at least 1 million barrels a day, more than is pumped by Qatar. OPEC ministers meet Nov. 29 in Cairo and again in Algeria on Dec. 17.

“The pressure is on,” said Harry Tchilinguirian, senior oil analyst at BNP Paribas SA in London. “To get the market’s attention they will need to cut at least 1 million barrels a day, yet previously announced cuts are still ongoing,” raising concern further reductions may not be made, he said.

OPEC producers and drillers from Exxon Mobil Corp. to BP Plc are already suffering from falling prices, and OPEC President Chakib Khelil said prices have declined enough to threaten future energy investments. OPEC’s oil export revenue will be $979 billion in 2008, 9.6 percent less than expected a month ago, because of sinking crude prices, the U.S. Energy Department forecasts.

The Cairo summit, originally intended for only the group’s Arab members, was expanded to a full OPEC meeting as oil prices dropped to a 21-month low.

Remove Surplus

Khelil, also Algeria’s oil minister, said Nov. 24 a reduction of 1 million barrels a day “is not going to be enough” to wipe out a surplus in the market. OPEC needs to wait for data early next month to make an informed decision, he said.

“First we need to find out whether what we have cut has been acted upon,” Khelil said in Vienna. “By that time we’ll also have an idea about the stocks level, depending on the deterioration of the situation, whether demand is falling or stabilizing. As of now I don’t think anyone can make a decision.”

Iran’s OPEC governor, Mohammad Ali Khatibi, said Nov. 14 the group is “very likely” to recommend a new cut.

Venezuelan Oil Minister Rafael Ramirez said Nov. 23 he will press for a reduction of 1 million barrels a day. The country’s president, Hugo Chavez, said Nov. 24 the group should target oil between $80 and $100 a barrel, reviving a “price band” system used in the 1990s.

Nigerian Petroleum Minister Odein Ajumogobia said he will press for greater compliance with the previous cutback, rather than seek another reduction. Saudi Arabia, the group’s biggest producer, has yet to disclose its opinion.

Quota Cuts

At its Oct. 24 meeting in Vienna, OPEC pledged to reduce supply by 1.5 million barrels a day. The 11 members without quotas are about 500,000 barrels above that target, according to estimates from tanker-tracking consultant PetroLogistics Ltd.

“Compliance will be difficult in a downward spiraling market,” said Victor Shum, senior principal at energy consultant Purvin & Gertz Inc. in Singapore. “They have budgets to meet and they want the other guy to cut so they get the full benefit of the higher prices.”

Among the analysts surveyed Nov. 21 by Bloomberg, 10 expect OPEC to lower production at the Cairo meeting. Another eight expect the decision to be taken later, when ministers meet Dec. 17 at Oran, on the Algerian coast.

Demand Outlook

Demand for oil may fall for the first time since 1983 next year, according to Merrill Lynch & Co., as the U.S., Europe and Japan face their first simultaneous recession since World War II. Oil futures touched a three-year low of $48.25 on Nov. 21, down 67 percent from a July record of $147.27. The contract traded near $50 on the New York Mercantile Exchange today. Some grades of lower-quality Middle Eastern oil fetch less than $45.

Oil use is dropping as the slowdown causes people to travel less, prompting British Airways Plc and Qantas Airways Ltd. to reduce capacity. The number of Americans traveling will fall for this week’s Thanksgiving holiday by 600,000, or 1.4 percent, the first drop since 2002, according to U.S. motorist group AAA.

The U.S. Energy Department expects OPEC’s earnings from oil imports to fall to $595 billion next year from $979 billion now.

Russia, the largest producer outside OPEC, “cannot rule out cutting production” and will “coordinate with OPEC” to defend the country’s interests, Energy Minister Sergei Shmatko said yesterday in New Delhi. So far this year, Russia has resisted OPEC’s calls for cooperation in constraining global oil supplies.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.netMark Shenk in New York at mshenk1@bloomberg.net;