Copy of Article from 10/28/08 Posting

Source: Platts Oilgram Price Report

Retrieved From: Lexis Nexis

Date: October 28, 2008

Title: Despite Cut, OPEC Remains Concerned: Badri

Byline: Kate Dourian

Length: 1095 Words

Link to relevant WorldOilNews blog posting here.

OPEC Secretary General Abdalla el-Badri said October 27 that OPEC was concerned by the continued fall in oil prices even after the group agreed to cut supply by 1.5 million b/d and he did not rule out the possibility of a further emergency OPEC meeting before a planned December 17 gathering in Algeria, Kuwait's official news agency KUNA reported.

It quoted Badri as saying in an interview that the fall in oil prices below $70/barrel would jeopardize all future energy projects and he called on non-OPEC producers Russia, Mexico and Norway to cut oil supply and help OPEC balance markets.

KUNA quoted Badri as saying the October 24 agreement by OPEC in Vienna to slash supply by 1.5 million b/d from next month was "a wise decision at this time."

It said Badri explained that the decision was taken after studying supply and demand data which showed that supply next year would be higher than demand because of the economic crisis "and therefore a decision was taken to try to prevent a further deterioration in oil prices and to stabilize the market."

Badri said he hoped the agreement would help to achieve both these goals but that the producers' club would watch closely market developments in the next few weeks "to determine if there is a need for further action."

He noted that oil prices had fallen by more than 50% since July, when front-month WTI crude oil futures traded at an all-time high of $147.27/b, and said OPEC expected a further weakening in energy demand as a result of the financial crisis.

The group wanted to see "reasonable and fair" oil prices, at a level that serves both producers and consumers.

Badri, who visited Moscow before the OPEC meeting, said he had discussed with Russian leaders the need for cooperation among all producers to stabilize the market at a time of falling demand.

Pointing out that OPEC accounts for just 40% of global supply, Badri said non-OPEC producers Russia, Norway and Mexico "should contribute by cutting production because a fall in oil prices below $70/barrel will affect all energy projects worldwide in the future."

The biggest cut will come from OPEC kingpin Saudi Arabia, which will trim output by 466,000 b/d. The kingdom, which raised supply unilaterally by around 500,000 b/d between June and August this year to meet what it said was higher demand from its customers, already has implemented some cutbacks as demand subsided.

Saudi Arabian oil minister Ali Naimi told the Saudi-owned newspaper al-Hayat on October 25 that Saudi output would fall to 8.6 million b/d in November following the latest OPEC decision.

Naimi explained that the producers' club decided to reduce its collective output target to 27.3 million b/d from 28.8 million b/d to correct a "big imbalance" between supply and demand.

"Through our observation of the market from the supply and demand side, it became clear to us that supply is far higher than demand and we also noticed that global inventories were rising and that if we did not take this action, there would have been a big imbalance in the market and this has nothing to do with price," Naimi said.

He said that one of the reasons for the volatility in oil prices was the surplus in inventories "and this is what we are trying to avoid." Oil prices were being affected by other factors, Naimi added, including speculation, geopolitical tensions and weather-related incidents.

The kingdom had increased production in the summer partly because prices had risen to unreasonable levels and because of higher demand from lifters of Saudi crude, Naimi said, adding that it produced nearly 9.7 million b/d in August.

He did not give any figures for Saudi supply in September. But a Platts survey of OPEC production showed Saudi output fell to 9.5 million b/d last month.

Naimi told al-Hayat that "starting in November, Saudi production will be around 8.6 million b/d," but he gave no indication of volumes produced in October.

"What we have noticed with our customers is that as a result of the global economic slowdown and the bankruptcies of several banks, that they are unable to buy crude because there is no liquidity and this reduces demand for oil," he said. "So when a producer sees lower demand for its crude sales, there is no need to produce volumes that are not wanted and which will only go into storage."

Asked if the global economic slowdown might lead to a further cut in OPEC's production, Naimi replied: "Anything is possible and the problem with predicting this is that it will depend on the state of the world. So if the recession continues and demand for crude oil falls further, there is no doubt that this will require further measures."

But the Saudi minister said he hoped economic conditions would improve and the global economy would grow next year, which would translate into higher demand for crude.

Naimi said the current surplus showed those both in and outside OPEC were producing volumes of oil for which there were no customers. He added: "This is why we took this decision and called on other producers, such as Russia and others, to cooperate with us to prevent a further deterioration in prices...we want all producers to be aware that if prices continue to fall, investment in upstream activity will fall and this could lead to a shock and lower demand in the future when demand growth returns to normal."

Meanwhile, OPEC's number two producer Iran said October 26 the cartel may cut output again if the latest agreement fails to stabilize the oil market.

"Be assured that if the recent decision is not effective on the market, OPEC will take steps to consolidate the market and stabilize prices at its next meeting which will be held in [Algeria] in December," Iran's OPEC governor, Mohammad Ali Khatibi, said.

"Currently some members produce more than their quotas. If these countries observe the quotas, about 500,000 barrels will be cut from the current OPEC production volume," he said as quoted by Iran's Mehr news agency, monitored by the BBC.

The 1.5 million b/d cut agreed in Vienna will be divided among 11 members and made from a baseline of 28.808 million b/d, which is derived by subtracting Indonesia's allocation from the 29.673 million b/d 12-member ceiling set in September 2007. Indonesia will leave OPEC at the end of the year and was not part of last week's agreement. Iraq does not participate in OPEC output pacts.

The decision has so far failed to halt the sharp decline in oil prices. North Sea Brent crude traded as low as $59.02/b on October 27, its lowest level since February 22, 2007.