OPEC to Hold Quota After Oil Reaches $75 Saudi Target

By Grant Smith and Ayesha Daya

Sept. 7 (Bloomberg) -- OPEC’s success in more than doubling oil prices since a five-year low in December will probably persuade ministers to maintain production quotas after this week’s meeting.

Reducing shipments beyond record cutbacks last year would endanger the global economic recovery, the Organization of Petroleum Exporting Countries’ president said last week. Oil rose to $75 a barrel on Aug. 25, the price Saudi Arabian King Abdullah says is fair for consumers and producers.

“OPEC countries will be pleased by the price, which they couldn’t have anticipated back in January,” said Edward Morse, the head of economic research at LCM Commodities LLC in New York. “They won’t seriously consider deepening or extending the cuts at this stage. OPEC has taken a lot of oil out of the market, and it’s going to clear the market up.”

Ministers from Kuwait, Iran, Libya, Qatar and Iraq have in the past three weeks made similar comments to OPEC President Jose Maria Botelho de Vasconcelos, signaling they support existing quotas. The group won’t change output at the Vienna meeting, Agence France-Presse reported yesterday, citing comments by Iran’s OPEC Governor Mohammad Ali Khatibi.

All the 26 analysts surveyed by Bloomberg News predicted four days ago the group will maintain its target at 24.845 million barrels a day at the Sept. 9 meeting in the Austrian capital. OPEC supplies about 40 percent of the world’s oil.

Crude oil for October delivery was trading at $68.08 a barrel on the New York Mercantile Exchange at 11:23 a.m. in Singapore, recovering from a five-year low of $32.40 in December.

‘Early Stages’

“OPEC is very aware the economic recovery is in the very early stages and that they need to be careful about that,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “If they cut quotas they’d risk pushing the price up too far, too fast.”

OPEC members have shipped more oil onto the market since April to capture the rise in prices. Saudi Arabia, OPEC’s largest exporter, and other Persian Gulf states are pumping near or below their specified allocation.

Countries from Iran to Venezuela are exceeding their production targets to maintain government revenue, and the states will be encouraged to comply with their agreed limits, an official from a Persian Gulf OPEC member said Sept. 2.

The 11 members bound by targets have increased total production, leaving their compliance rate with the 4.2 million barrel-a-day reductions agreed upon last year at about 70 percent. They supplied 26.055 million barrels a day last month, 1.2 million barrels a day more than the limit, according to Bloomberg estimates.

Reduce Cheating

“I expect them to make a valiant effort to reduce the level of cheating that I believe has grown by more than half a million barrels since March,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington.

Stockpiles in the world’s most advanced economies equal about 62 days of consumption, according to the Paris-based International Energy Agency. OPEC ministers have said they want to lower stockpiles to between 52 and 54 days of demand.

“The producer group will undoubtedly express nervousness at the high level of inventory in the system,” Lawrence Eagles, the global head of commodities research at JPMorgan Chase & Co. in New York, said in a Sept. 3 note. “They are not only correct to be biting their fingernails, but may also be forced, in short order, to tighten compliance.”

Oil surged fivefold in five years before peaking at $147.27 in July of last year. In the same period, OPEC oil production rose 23 percent to a record 32.775 million barrels a day. As the financial crisis spread, fuel demand and oil prices collapsed.

December Pact

OPEC responded with three production cuts totaling 4.2 million barrels a day. At its Dec. 17 meeting in Oran, Algeria, the group agreed to lower output by 2.2 million barrels a day, extending curbs announced in September and October.

At subsequent meetings in March and May, ministers decided to hold quotas steady as Saudi Arabian Oil Minister Ali al-Naimi said OPEC was willing to see oil prices below its desired level to help the global economy. King Abdullah said in November that $75 was a price that balanced the interests of oil producing and consuming nations.

“We have been seeing slowly a much reduced variation of oil prices,” OPEC President Botelho de Vasconcelos, who is also Angola’s oil minister, said last week in an interview in Luanda. “This is a sign that the world economy is recovering. Everything shows that they will keep output unchanged.”

Ministers will gather for this week’s meeting at the group’s headquarters at 9:30 p.m. because the summit falls during the Muslim holy month of Ramadan.

Companies Lose

Lower quotas hurt foreign oil companies working in OPEC countries, such as Paris-based Total SA, which pumps oil in Angola.

“Unfortunately we are losing a good amount in production,” Total Chief Executive Officer Christophe de Margerie told reporters last week in Paris. “They’re often less-profitable barrels than what we produce in other countries so the impact on profit is less.”

While OPEC makes the steepest supply cuts in its history, some producers outside the group have bolstered market share to fill in the gap. Non-OPEC suppliers, including Russia and Brazil, will collectively raise daily output this year by 350,000 barrels to 51 million barrels a day, according to the IEA.

The group’s 12 members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. The group is scheduled to meet again in late December in Luanda.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Ayesha Daya in Dubai adaya1@bloomberg.net