- The Washington Times - Tuesday, January 16, 2001

LONDON OPEC members plan to curtail their oil production tomorrow amid signs of U.S. economic frailty and fears of a weakening demand for oil.

Haunted by recent memories of oversupply and plunging prices for crude, representatives of the Organization of the Petroleum Exporting Countries are expected to approve a cut of at least 1.5 million barrels a day when they meet in Vienna, Austria, despite appeals from the United States and the European Union.

"We want the market to be in a stable mode. Therefore, we need to take a reduction. The size of the reduction will probably be around a million and a half" barrels a day, Saudi Arabian Oil Minister Ali Naimi said yesterday in Vienna. Saudi Arabia is OPEC's largest producer.

A reduction of that amount would equal about 5 percent of the cartel's current output.

OPEC supplies almost two-fifths of the world's crude, and it wants to keep prices firm and revenue flowing even if the U.S. economic slowdown infects the economies of other major oil-importing nations.

In an unusual move that underscores OPEC's determination, Saudi Arabia already has alerted customers that it plans to pump less oil beginning next month, energy analysts said.

"It seems to be almost a foregone conclusion that there will be a cut," said Mehdi Varzi, a senior oil analyst at Dresdner Kleinwort Benson, an investment bank in London.

"The surprise would be if this doesn't happen," added Peter Gignoux, head of the petroleum desk at Salomon Smith Barney.

The European Commission, the executive arm of the 15-nation European Union, urged the cartel yesterday not to cut production. The European Union, with the United States, want oil prices remain at a stable level between $20 to $28 a barrel.

"The fear is that this action is a bit hasty," said EU spokesman Gilles Gantelet. "This gives rise to a yo-yo effect [in prices]."

Energy Secretary Bill Richardson, who traveled to the Persian Gulf to press OPEC members to keep output at current levels, said yesterday he had been assured that a cut will be "significantly lower" than 3 million barrels a day.

He told reporters in London that the group has not made a final decision on the size of the expected cut.

"If OPEC decides to make cuts, we hope it will act in a cautious and measured fashion," he said.

Nevertheless, the implications for consumers are not clear, primarily because Iraq continues to withhold the bulk of its crude from market. Iraq is embroiled in a pricing dispute with the United Nations, which regulates all Iraqi exports.

If Iraq resumes exporting normally next month, the anticipated OPEC cutback won't do much to unsettle prices, analysts said. However, if Iraq stays out of the market in February, the combined effect of a cut in OPEC production likely would cause a shortage of oil.

"You could see prices back above $30 again," Mr. Varzi said.

Oil prices peaked at more than $35 last year, then drifted lower before rebounding this month with other energy products.

February contracts of North Sea Brent, the European benchmark crude, traded yesterday at $26.18 a barrel, up 43 cents on the International Petroleum Exchange in London. Light, sweet crude traded Friday at $30.05 a barrel on the New York Mercantile Exchange. Nymex was closed for trading yesterday because of the national holiday observing Martin Luther King's birthday.

OPEC's meeting, itself, is evidence of the group's concern about market conditions.

It comes just two months after OPEC's November session in Vienna. At that meeting, oil ministers decided to keep OPEC's output steady after having increased production by 3.7 million barrels a day during 2000.

The United States was a major factor in those earlier increases. As the world's No. 1 consumer of crude, the United States was alarmed as the price of oil approached $40 a barrel, and it lobbied hard for OPEC to pump more.

This time, however, OPEC members seem less responsive to U.S. pressure.

Saudi Arabia and others have called for cuts totaling 1.5 million barrels a day, while Iran OPEC's second-largest producer and Qatar have called for bigger cuts.

The suddenness with which the U.S. economy began sputtering this winter appears to have galvanized OPEC into curtailing output.

Energy analysts suggested that OPEC is eager to avoid repeating its mistake of December 1997, when it decided to boost output shortly before the Asian financial crisis throttled demand. Prices bottomed out a year later at about $10 a barrel.

Still, Sheik Ahmed Zaki Yamani, an influential former Saudi Arabian oil minister, warned OPEC last week against cutting its production before seeing what Iraq planned to do.

Iraq has slashed its crude exports by about 1.7 million barrels a day, shipping 600,000 barrels a day in December. The interruptions are continuing.

"We certainly don't have a pattern of regular supply that we've been used to in the past," Mr. Gignoux said.

If OPEC does trim its official production by 1.5 million barrels a day, the actual decrease would be closer to 1.3 million barrels. That is because some members are unable to meet their current production quotas, analysts said.

Iran, Indonesia, Nigeria and Venezuela are producing at levels below their quota levels, Mr. Gignoux noted.

But some analysts estimate that global supply outweighs demand by roughly 1.3 million barrels a day. If true, a nominal OPEC cut of 1.5 million daily barrels could be right on the mark.


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