Opec to hold oil flow steady amid timid recovery

Major oil exporters will hold the flow steady at Wednesday's Opec meeting but will crack down on those breaching agreed cuts, as energy demand remains weak despite signs of economic recovery, analysts said.

A vicious global economic downturn has slammed demand for energy, dragging crude prices from record highs of above $147 in July 2008 to $32 in December. They have since recovered to around $70.

Now ministers from the Organisation of the Petroleum Exporting Countries (Opec), whose economies are highly dependent on oil exports, must steer a careful course, supporting prices but not alarming markets by trying to do so too aggressively, analysts said.

"The current [oil production] quota system should not undergo any changes," said Angola's Oil Minister Jose Maria Botelho de Vasconcelos, current president of Opec, this week.

Prices have picked up with tentative signs of a recovery in the world economy, while compliance with emergency cuts made last year to support prices has slipped, analysts said. Iran and Angola are seen as the main culprits in exceeding their quotas.

"The decision to cut output further would likely lack widespread credibility because it is unclear which countries would be willing and able to stick with it," analysts at Vienna-based consultancy JBC Energy wrote.

"In addition, a reduction in supply allocations might also be regarded as sending the wrong signal at the wrong time to the markets as it would indicate that Opec has strong doubts concerning the rebound of the global economy."

Opec, whose 12 members pump 40 per cent of the world's oil, agreed in late 2008 to remove a massive 4.2 million barrels of daily output from the market as it sought to prop up crumbling prices. The group's official daily output quota has stood at 24.84 million barrels per day since January.

At this week's meeting, "a decision to do anything but leave output targets as they are would come as a surprise", the JBC analysts said.

"However, given the likelihood that economic sentiment will sour in the coming months as the recovery could stall, Opec might try to enforce compliance more strictly."

Analyst Frederic Lasserre at French bank Societe Generale said there was little pressure for change, with current prices acceptable to most producers and consumers given uncertainty about when demand would pick up.

"At $70 there is no pressure to lower production. Everyone is earning well. There is no pressure to lift production either," he said.

"Demand has not really recovered", including in the key energy-hungry Chinese market, he added. Kuwait's Oil Minister Sheikh Ahmad Abdullah Al Sabah said last month that an Opec output cut was unlikely because oil prices were "not bad at all", adding that he was optimistic demand would pick up in the near future.

Analysts say most member countries are satisfied with prices in the range of $70 to $80, enough to fund investment in future production, despite calls from hawks such as Iran and Venezuela to push them higher.

Analyst David Kirsch at the PFC Energy consultancy said further output cuts could be considered as a way to counter the effect of high oil stockpiles, which can depress prices, particularly when demand is weak. "In our view, a cut has to be on the table," Kirsch said.

Opec's most influential member Saudi Arabia is likely to resist pressure for cuts given the delicate economic outlook, said John Hall, an independent London-based analyst.

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