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THE WALL STREET JOURNAL: OPEC Pins Hopes on U.S. Soft Landing

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By NEIL KING JR.
February 1, 2008

VIENNA — With OPEC widely expected to hold oil production steady at its meeting today, the cartel’s leaders are facing the politically thorny possibility of an output cut in the weeks ahead.

For now, the Organization of Petroleum Exporting Countries hopes the U.S. Federal Reserve’s rate cuts will bring the U.S. economy in for a soft landing. The U.S. is the world’s largest oil consumer. A stronger U.S. economy would shore up demand, stabilize oil prices and give leverage to OPEC members who want to keep production levels where they are.

But should the U.S. economy continue to slow or slip into a recession, it could hurt consumption and have a ripple effect on other economies, pressuring OPEC members to cut output. That could anger big consuming countries like the U.S. and provoke a political backlash against the cartel, which supplies nearly 40% of the world’s oil demand of some 86 million barrels a day.

A vocal minority within the cartel, led by Iran, suggests that OPEC should think about slashing output by at least 500,000 barrels a day when it meets next, in March. That contingent points to rising oil stockpiles in the U.S. and Europe, and signs of sluggish demand growth to argue that the world may face too much oil by early summer.

As futures prices in New York soared to an intraday high of $100.09 a barrel last month from an average of $22 in 2002, OPEC ministers said they have no sway over a market they see as driven by speculators and currency fluctuations.

An output cut, however, would broadcast that OPEC intends to defend current price levels against downward pressures — a step that could provoke an outcry among consuming countries. Algerian oil minister Chakib Khelil, the OPEC president, said he doubted the cartel would move to cut output, “because psychologically it’s not possible.”

Two formal moves by OPEC to trim output in late 2006, when prices were around $60 a barrel, helped set the stage for the price run-up in the second half of last year. Several of the group’s largest producers, particularly Saudi Arabia, have added to world supplies since September in an effort to both take advantage of high prices and add new supplies to take the pressure off crude’s rising cost.

U.S. benchmark crude fell 0.6% to $91.75 yesterday on the New York Mercantile Exchange.
 
The Saudi oil minister, Ali Naimi, has shed little light on his thinking leading up to today’s meeting. Mobbed by reporters as he comes and goes from his hotel, Mr. Naimi said supply levels were “sound.”

Saudi Arabia has faced pressure recently from the U.S. and Europe to raise output. President Bush and his energy secretary, Samuel Bodman, both visited Riyadh last month to urge Saudi Arabia to increase oil supplies, arguing that high oil prices were crimping the U.S. economy. While shrugging off U.S. pressure, the Saudis have quietly moved to put more oil on the market.

The dream scenario for OPEC would be a world economic picture in which demand and other factors remain steady enough to keep oil at around $85 a barrel, with OPEC having neither to boost nor cut output. That would serve to keep gasoline prices off the U.S. political agenda during the presidential campaign.

It also would mask the divide within OPEC between hawks such as Iran and Venezuela, which want the cartel to exert its muscle over prices, and more moderate members such as Saudi Arabia and Kuwait, which seek to avoid clashes with Washington and worry about the fate of the world economy.

Write to Neil King Jr. at [email protected]

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