Opec avoids 'quick fix' measures to lift revenue

VIENNA - Opec tried yesterday to nudge oil prices up by urging its members to stop overproducing, but the cartel decided not to cut output levels which could have driven prices sharply higher.

Explaining the decision, Opec Secretary-General Abdalla el-Badri spoke of his organisation's concern over "ugly" global economic times that overrode the desire to achieve a quick fix by setting a lower overall output for the 12-nation producer's club.

"We see people who are out of work, we see people in tents in the most rich countries," he said. While Opec's goal remains higher prices for its product, "the time is not right" for more radical measures, he said.

The decision was sure to be welcomed by the US and other major oil-consuming countries, because setting lower output limits could have jolted the world economy through a sudden price increase.

It also reflected the realisation from the Organisation of the Petroleum Exporting Countries that any action more drastic than calling for quota compliance at a time of global economic crisis could ultimately backfire in real terms, by further depressing demand and driving down prices.

The Opec decision came as the world took a breather from the usual relentless slew of bad news since the financial crisis became most acute last October. The Dow Jones industrial average is up around 10 per cent, and most Asian and European markets also rose. However, Governments and investors are wary of calling it the start of a turnaround.

"They have recognised the fact that they ought to be cutting," said trader and analyst Stephen Schork. "But they have taken into consideration that this could potentially set prices on fire, which would have retarded the nascent economic recovery that we have seen."

The move, he said, "sends a strong message to producer and consumer alike that we are all in this together - they need us to buy and we need to afford to be able to buy".

The ministers agreed to meet in special session on May 28 to review prices and supply. That gathering could decide to reduce the oil producing club's output levels, if the oil ministers think that crude prices remain too low and the global economy has improved. Cheap oil has been a rare bright spot in the otherwise gloomy world economic picture, selling in the mid- to upper-US$30s last week - less than a third of its summer record levels. But while benefiting consumers, those prices have forced many Opec members to revise spending and warn they cannot invest in further oil production.

Some Opec nations had urged direct oil output cuts by setting lower levels, as the 12-nation organisation usually does when it wants to raise prices.

But Opec's de-facto leader, Saudi Arabia, and others had instead favoured calling on overproducing members to comply with their quotas as a way of reducing world oil supply without causing prices to rise rapidly.

Cuts agreed on since September were meant to take a daily 4.2 million barrels off the market. But the 11 members that are under production quotas are still overshooting their joint daily target level of just under 25 million barrels by more than 800,000 barrels a day, or 21 per cent above formal set limits.

While 100 per cent compliance with quotas is unlikely, even an additional 10 per cent would take more than 400,000 barrels a day off markets, slicing into oversupply while reducing the price shock that an outright cut in existing quotas would have caused.

"We have urged our member countries to comply," said el-Badri. "We have an overhang of 800,000 to 900,000 barrels. If we have more compliance, we can reduce it further."

Opec President Jose Maria Botelho de Vasconcelos, Angola's oil minister, acknowledged the group had little authority to enforce quota compliance on cheating members. But he said the 12-nation producers' club would "continue working with countries that are not complying, so that they do".

London-based analyst John Hall said Angola was among those, producing a daily 130,000 barrels above its quota. He welcomed yesterday's decision as "supporting rescue packages already announced by various Governments" seeking the way out of the economic crisis.

Also yesterday, Russian Deputy Premier Igor Sechin announced that his country was reducing crude sales in an apparent boost for Opec, which has repeatedly urged Russia for support as the world's second largest producer after the Saudis.

At its peak in early 2008, Russia was producing 9.5 million barrels of crude a day. But those levels have been shrinking and the announced cuts could be just a way of dressing up Moscow's inability to keep up present output levels because of lagging investment that is expected to result in an output decline of around 2 per cent this year.

- BLOOMBERG