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27 May 2024

Recession sparks fears of Opec cut

By Nadim Kawach



The 13-nation Organisation of Petroleum Exporting Countries could heed calls by the United States and other major oil consumers to act when it meets in Vienna this week. But its response could be right in the other direction – cutting rather than raising production.


While Opec, which pumps over a third of the world’s crude output, has already indicated it is not willing to increase output, there are worries it could even go further by cutting supplies.


Fears of a cartel decision to trim production for the first time in several years surged, after signals of a US economic recession depressed crude prices this month and could send them further down if Opec boosts output.


In its latest monthly oil market report, Opec gave a strong hint that the recent market situation could warrant an output cut rather than an increase.


Another report by a London-based oil studies centre owned by former Saudi Oil Minister Sheikh Ahmed Zaki Al Yamani warned that Opec could opt for a cut.


“Opec’s oil ministers will face a difficult decision when they meet in Vienna at the start of February. While US President George W Bush and other leaders of major oil-consuming countries are calling on them to raise output even further, there is a danger that the ministers might veer in the opposite direction and cut production,” the Centre for Global Energy Studies (CGES) said. “This is certainly a possibility if the US economic outlook continues to weaken and the oil now at sea, as a result of Opec’s small production surge in December, begins to depress prices further once it starts to arrive at its destination.”


Opec twice boosted output last year but prices remained high and smashed through the 100-dollar mark early this month, before they receded last week on news of weakening US economy and a Fed decision to lower interest rates.


The price of Opec’s basket itself hit a record $93.78 early this month on the back of the weak dollar, stock draws in the US, geopolitical developments and higher speculative activities. But it began to retreat to reach $85.34 on January 21 because of the weak economic outlook and rising fears of a US recession.


“Opec seems now to be panicking at a decline of even $1 in oil prices, as it fears it would not be able to stop this decline. It has many bitter experiences in this respect,” a Gulf oil expert said.


“In the present situation, I don’t think the organisation will even consider increasing production. It might even think of a small cut when it meets this Friday and again on March 5. There are many indications that point in this direction, including recession fears, lower seasonal demand in the second quarter, an expected decline in demand for its crude as well as uncertainty about non-Opec supply,” he said.


In its January oil market report, Opec said world economic growth in 2008 is projected to slip by around 0.1 percentage points to 4.7 per cent following downward


revisions in all the three OECD regions.


Developing countries’ growth was left unchanged at 6.1 per cent as downward revisions in the Asia Pacific region balanced small upward revisions in Latin America. The Chinese growth forecast of 9.9 per cent remains unchanged from the previous month, as measures to slow down the economy begin to take hold, after the strong 11.5 per cent performance in 2007.


The report noted that fears of a US economic recession had increased following a spate of negative reports in December showing a drop in manufacturing output, rise in unemployment rate and fall in retail sales.


Euro-zone data also point to slowdown, accompanied by lower consumer and business confidence and mounting inflation, while Japanese economic prospects have dimmed with consumer demand expected to stagnate amid falling wages and rising prices, the report said.


Its figures showed demand for Opec crude in 2007 is expected to average 31.8 mb/d, an increase of 0.2 mb/d over the previous year. In 2008, the demand for Opec crude is expected to average 31.5 mb/d, a decline of 0.3 mb/d.


“Non-Opec supply is an important variable in determining the demand for Opec  crude. A look at the range of forecasts from various sources shows considerable uncertainty in the outlook for non-Opec supply growth for the first half of 2008, especially for the first quarter,” the report said.


“Currently, first-quarter forecasts range from negative growth to positive growth of well over one million barrels per day. Combined with uncertainty impacting demand growth due to rising fears of a recession in the US and economic slowdown in other regions, this has resulted in an even higher level of uncertainty for the estimated demand for opec crude. As always, Opec member countries are monitoring market developments closely and will review the situation at the upcoming Meetings of the Conference on February 1 and March 5. In the meantime, Opec has reiterated its readiness to increase supplies when justified by market fundamentals,” the report said.


Opec basket prices hit a record $61.08 in 2006 and climbed to another record of $69.1 a barrel in 2007. Although it has not defined the exact price target, Opec’s behaviour over the past two years indicated it favoured prices at more than $80.


“Opec member countries have become dependent on the soaring oil revenues of recent years and are likely to seek to defend them in the face of a weakening global economy by cutting production to maintain prices,” CGES said. “Such a course of action would only hasten the economic slowdown, creating a succession of output cuts to sustain high prices that would put pressure on Opec’s cohesion and harm oil’s long-term prospects.”