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article imageExperts Say OPEC Must Make Big Supply Cut

By Bob Ewing     Dec 13, 2008 in Business
Industry analysts and OPEC delegates, both, are saying that OPEC must make a major supply cut to halt further falls in oil prices.
OPEC is being called upon to make a major cut in supplies.This would be its third reduction since September.The cut is necessary to prevent further falls in oil prices as world demand slumps due to slowing economies.
Output should be cut by at least one million barrels per day at the Dec. 17 meeting, OPEC delegates and analysts said. There are some who even suggest the minimum reduction should be two million bpd.
“The whole world economy is in turmoil,” Shokri Ghanem, Libya's top oil official, said. “We think this needs substantial action.”
There is no signs of unity among the OPEC members so this cut may be difficult to achieve. Oil has hit a four-year low near $40 (U.S.) a barrel.
Libya, Iran and Venezuela have all called for OPEC to cut output further; however, Saudi Arabia, OPEC's top exporter, has yet to publicly back another reduction.
To date, OPEC has implemented two-thirds of a Nov. 1 agreement to cut output by 1.5 million bpd and at a meeting in September, it decided to lower supplies by about 500,000 bpd.
Analysts and traders say OPEC needs to do more than improve compliance.
“To do nothing is not an option, that's what we saw last time,” said Rob Laughlin, and oil analyst at MF Global.
“I'm looking for a one-million-barrel to 1.5-million-barrel cut. If they fail to do that, they will lose further confidence in the market.”
While OPEC does not have a formal price target, Saudi Arabia's King Abdullah said last month that $75 a barrel was a “fair price” for oil, a view later backed by other OPEC members, including Kuwait and Nigeria.
Without a big supply cutback that is swiftly implemented and communicated by OPEC members to their oil buyers, $75 oil may remain more of an aspiration than a reality.
“The problem OPEC faces is one of credibility,” said David Hufton of brokers PVM in a report.
“If OPEC is indecisive and unconvincing on Dec. 17, they risk meeting again in [the first quarter] next year with crude at $30.”
OPEC's ability to prop up the market could gain a boost if it secured the co-operation of non-member countries, such as Russia.
Russia, the largest non-OPEC oil exporter, plans to attend the Dec. 17 meeting in Oran, Algeria. Lately, Russia has worked more closely with OPEC and agreed to co-operate with the group to study the market.
Moscow has stopped short of committing to any kind of co-ordinated supply cut.
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