OPEC oil cartel keeps output steady

George Jahn ,  The Associated Press ,  Vienna   |  Thu, 05/28/2009 11:43 PM  |  Business

OPEC oil ministers on Thursday avoided the temptation to cut crude production and trample on the seedlings of economic recovery. Instead, they bet on prices floating higher as the recession eases and demand for oil picks up.

With the world oversupplied with oil, Thursday's meeting of the 12-nation oil producing cartel could have opted to tighten the spigots - an option it has often exercised to raise prices in past times of anemic demand.

An OPEC statement announcing the decision to keep production quotas at present levels noted that worldwide oil inventories at the end of last month were at a 20-year high.

But with the world still in the grip of recession, cutting back production could have backfired by spiking prices and prolonging any economic uptick. That, in turn, could have directly hurt OPEC by further reducing the world's capacity to pay for costly crude and leading to an even greater overhang in supplies.

The oil ministers instead opted to sit back and wait, in a decision driven by the belief that the U.S. - the world's largest oil consumer - is gradually emerging from a severe recession and that demand there will support oil prices.

"We think that the economy, especially the American economy, is going to pick up," said Shokri Ghanem, Libya's top oil official, while OPEC Secretary General Abdalla Salem El Badri spoke of "a light in the end of the tunnel."

"We don't want to give a wrong signal to the market," El Badri said, when asked why the Organization of the Petroleum Exporting Countries decided against cutting production despite their concerns about significant oversupply and weak demand from the U.S. and other major consumers hobbled by the recession.

OPEC President Jose Maria Bothelo de Vasconcelos - who is also oil minister of Angola - voiced the same message. He said the decision to maintain targets "sends a signal of the optimism that all members of the organization are currently feeling" about the chances of an approaching economic upturn.

A barrel of crude already fetches more than $60 compared to levels near $30 just four months ago. And that spike has come despite continued weak world appetite for crude.

Still, the stunning fall of crude from its lofty 2008 highs of $147 a barrel continues to leave some OPEC members hurting.

In Iran, critics of the hardline regime accuse President Mahmoud Ahmadenijad of squandering the country's oil wealth on feel-good, projects. The issue has become a major factor in the run-up to the presidential elections next month.

Market reaction appeared to indicate OPEC calculation may be right. Benchmark crude for July delivery was up 26 cents to $63.71 a barrel by early afternoon in Europe in electronic trading on the New York Mercantile Exchange. Prices have not been at that high level since early November

An OPEC statement said the that members "decided to maintain current production levels unchanged for the time being," while restating their "firm commitment" to their existing quotas, in an effort to trim oversupply.

Most organization members are supposed to honor individual production targets. But the Organization of the Petroleum Exporting Countries is still pumping more than 800,000 barrels a day above its overall target level of just under 25 million barrels.

While 100 percent compliance with quotas is unlikely, even an additional 0 percent compliance would take more than 400,000 barrels a day off markets, slicing into stocks in storage while reducing the price shock that an outright cut in production could cause.

Still, Thursday's decision did not signal that OPEC was happy with present prices. Oil ministers have repeatedly said thy would like to see crude rise to around $80 a barrel, even while being content to let economic factors do their work for them.

"OPEC is trying to get the world more conformable with the idea of $75-80 oil," said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore.

Some investors have been pushing up the price of oil by buying it as a hedge against a weaker U.S. dollar, and Kornafel said that "as long as money is being printed left and right you're going to see it flow into the commodity markets and crude keep going higher."

But recent oil price hikes have been tied even more to rising international stock markets, taken as a signal of recovery.

About 74 percent of the forecasters in a survey by the National Association for Business Economics in the U.S. expect the recession, which started in December 2007, to end in the third quarter. Another 19 percent predict the turning point will come in the final three months of this year and the remaining 7 percent believe the recession will end in the first quarter of 2010.

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