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OPEC to Discuss Another Round of Production Cuts

THE WALL STREET JOURNAL

NOVEMBER 28, 2008

Crude-Price Plunge of the Past Four Months Raises Stakes for Cartel’s Members, Who Will Meet Saturday in Cairo

By NEIL KING JR. and SPENCER SWARTZ

Having failed twice in two months to calm plunging oil markets, OPEC ministers are set to weigh another round of steep production cuts as the world’s economic travails continue to drive crude prices to levels unseen in years.

The Organization of Petroleum Exporting Countries has scrambled since September to stem the fall in oil prices, which is putting pressure on OPEC budgets from Ecuador to Kuwait. Ineffective in blunting the price spike earlier this year, the organization is proving similarly hapless in putting a floor under collapsing prices.

[OPEC's secretary-general, Abdalla Salem El-Badri, said the crude-oil market is oversupplied, as he arrived Thursday in Cairo for Saturday's meeting.]Bloomberg News/Landov

OPEC’s secretary-general, Abdalla Salem El-Badri, said the crude-oil market is oversupplied, as he arrived Thursday in Cairo for Saturday’s meeting.

The group’s 12 ministers will meet Saturday in Cairo to decide whether to move ahead on another cut of a million barrels or more after agreeing to a total cut of two million barrels a day at two meetings over the past two months.

Their message going into the Cairo session has been mixed at best, with most ministers suggesting that any firm decision be postponed until they meet again in formal session next month in Algeria.

After hitting a record of nearly $150 a barrel in July, crude prices have since fallen to nearly a third of that in just four months, the steepest price collapse since formal futures trading began in 1981.

Thursday afternoon, the front-month January Brent contract on London’s ICE futures exchange was down 36 cents at $53.56 a barrel.

Floor trade on the New York Mercantile Exchange was closed for the Thanksgiving holiday.

The cartel’s de facto leader and the world’s largest exporter, Saudi Arabia, finds itself in a bind. Most OPEC members will face real economic problems if crude prices see a sustained drop below $50 a barrel.

But at the same time, Saudi Arabia risks cutting supply and reducing fuel inventories at a time when the global economy is wrestling with a multifront crisis.

OPEC’s ability to affect the market either way has been minimal, though, as demand continues to fall across the industrialized world and investment flows dry up.

[Crude]

Some analysts now predict that global demand could turn negative both this year and next, adding to a growing spare supply cushion that the world hasn’t seen for years.

OPEC countries appear so far to have abided fairly well by pledges made since September to cut supply.

OPEC provides around 40% of the 86 million or so barrels of oil the world consumes daily. But that cohesion could begin to fray as exports and prices both fall.

With financial and social pressures rising, some OPEC nations are nearing an inflection point economically that could result in members such as Venezuela, Ecuador and Nigeria flatly ignoring additional production cuts.

A Nigerian oil official said the country doesn’t want any more output reductions because Nigeria already is pumping below its OPEC allocation due to militant attacks on oil infrastructure that have shut around 600,000 barrels a day of production in past months. Nigeria is pumping around 1.95 million barrels a day, below its quota of 2.05 million barrels a day.

“We would have to go even farther below our quota if OPEC cuts more and that would hurt our government budget,” the official said.

The Nigerian government could slash its 2009 budget by more than 10% below 2008 levels based on a current draft budget, leading to all sorts of reductions in social spending in one of Africa’s poorest nations.

Ecuador Oil Minister Derlis Palacios this month said the country will seek an exemption from further OPEC output cuts because of the negative economic effect pumping fewer barrels would have on oil revenues and the country’s battered economy.

Ecuador, OPEC’s smallest member by production, is flirting with default on hundreds of millions of dollars of debt.

Citing falling oil prices and rising financial pressures, Angolan President Eduardo dos Santos said this week the West African nation mightn’t have all the economic resources to fully implement a $42 billion plan to rebuild infrastructure in the country.

PFC Energy analyst David Kirsch says no OPEC nation, not even the lowest cost producer Saudi Arabia, can maintain macroeconomic stability and all their current and planned budget expenditures if oil prices fall and stay under $50 a barrel.

The cost of lower oil prices is hitting Venezuela hardest, according to PFC’s calculations, as it requires an oil price above $90 a barrel to maintain financial stability.

Oil prices have fallen roughly 16% since OPEC announced plans to cut production by 1.5 million barrels a day at an emergency meeting in late October.

But what has changed fundamentally since that meeting is the expectation that the global economic downturn will be longer lasting and economic recovery, when it does happen, even more sluggish.

Indonesia won’t attend the weekend meeting. It no longer exports oil and will officially drop out of the cartel at the year’s end.

Write to Neil King Jr. at [email protected] and Spencer Swartz at[email protected]

WSJ ARTICLE

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