Opec keeps close eye on developments

Opec ministers said today they were unlikely to tamper yet with an output policy that is steering oil prices lower, easing pressure on consumer economies but still bringing in billions of dollars for producers.

But forecasts that demand for Opec oil will decline in 2007 are beginning to worry some in the group that pumps a third of the world's oil. They fear the $12 drop in the oil price from its July 14 record could turn into an extended slump.

Opec meets in Vienna later today (NZ time). It will consider a recommendation from its advisory committee that it keep its 28 million barrels per day production ceiling, for now, but leave the door open to another meeting before December if prices drop sharply.

"We have been oversupplying since about mid 2003, " said Opec President Edmund Daukoru, also Nigeria's energy minister. "We have really been pumping without bothering what the call on Opec is, but such history cannot go on for ever," he added. "It is time to say whether we need a good fresh hard look."

For over a year, Opec has been pumping at or near its fastest rate for 25 years to guard against price shocks. The Saudi-driven policy has succeeded and prices have sunk from a record US$78.40 a barrel on July 14 to above $66 on Friday.

But Opec see no need to cut production yet -- oil is still up US$5 this year and three times the price at the start of 2002.

Ministers are mindful that the Atlantic hurricane season still has several weeks to run and US Gulf of Mexico oil output has yet to recover fully from last year's storms.

Iran's dispute with the United Nations Security Council over its uranium enrichment programme also has the potential to drive prices higher. The United States favours sanctions against the world's fourth biggest oil exporter.

A quarter of Nigeria's oil output lies idle because of militant attacks and Iraq's exports are vulnerable to sabotage.

Surging oil prices boosted the value of Opec's crude oil exports by 45 per cent to a record US$513 billion last year.

But there are signs that economic activity is easing in top consumer the United States and the second biggest consumer China has raised lending rates to try to cool its economy.

Opec's economists are forecasting demand for Opec oil will drop 800,000 barrels per day to an average 28.3 million barrels per day in 2007 as new non-Opec production comes onstream.

"The geopolitical situation has cooled off somewhat and I believe it is the right time to relate prices to other fundamentals," Daukoru told reporters.

"We don't know when the bubble might break, we need to take a more realistic position," he said.

Qatari Oil Minister Abdullah al-Attiyah said Opec may well cut output in the months ahead.

Carl Calabro of PFC Energy in Washington said the real test for the organisation may come early next year.

"The concern is what happens to the price in spring when demand falls. World inventories are quite adequate at the present time," he said.

- REUTERS