Despite Calls to Increase Oil Output,OPEC May Cut Production in Spring

WALL STREET JOURNAL
By SPENCER SWARTZ and NEIL KING JR.

Despite calls by the Bush administration and European governments for OPECto pump more oil, the cartel may actually look to cut output this spring ifsigns continue to point to increasing oil supplies and diminishing demand.Such a move could worsen global economic conditions if U.S. financial woesdeepen, but OPEC's quandary over whether to lift or lower its productionhighlights what a tough year this could be for the 13-member organization.As it prepares to meet this Friday in Vienna, the Organization of PetroleumExporting Countries faces its murkiest economic outlook in years.A sharp economic downturn in the U.S. could seriously damp global demandgrowth. But the thirst for oil is still intense in China and the MiddleEast, and could pick up at any time in the developed world.On the supply side, a bevy of previously delayed oil projects are nowexpected to start delivering the goods. But it's unclear whether output fromnon-OPEC suppliers in Africa and Latin America will be large enough to makea real market impact.Amid such uncertainty, and with crude now trading at around $90 a barrel,OPEC ministers and officials say the group is likely to hold its formaloutput quotas steady at its Feb. 1 meeting in Vienna, but could move to cutoutput at its next meeting in March.U.S. light, sweet crude was trading down $1.32 at $89.39 on the New YorkMercantile Exchange, down 12% from its nominal record of $100.09 set duringintraday trading on Jan. 3.At its last meeting in December, OPEC kept production on hold, arguing thatoil supplies were adequate and that high crude prices were being driven byspeculative trading and other factors unrelated to supply and demand. Thecartel's output accounts for four out of every 10 barrels consumed globally.At the same time, traders say that OPEC members such as Saudi Arabia, UnitedArab Emirates and Angola have quietly added around one million barrels a dayto world supply since early last fall -- much of it above the formal limitsthe group sets on its own output. The world is now consuming around 86million barrels a day, 32 million barrels of which are pumped by OPEC.That added supply from OPEC has helped ease the unusually tight stockpilesin the U.S. and Europe during the last quarter of 2007. Tight inventorieswere among many factors that helped drive prices over $100 a barrel.In separate trips through the Middle East this month, President Bush and hisenergy secretary, Samuel Bodman, pointed to tight stockpiles as evidence whyOPEC should move to boost its output quotas.What appears certain is that OPEC itself is going to see its own productioncapacity increase this year by as much as 1.4 million barrels a day, asprojects in Saudi Arabia, Angola and Nigeria enter service. The kingdomalone is set to add almost 900,000 barrels a day in new capacity, frombasically no increase in 2007, with much of that starting in the firstquarter of this year.After years of dashed expectations, non-OPEC supply is also expected to pickup. Some analysts see an increase of as much as one million barrels a dayfrom suppliers such as Brazil, Sudan and even the U.S., though much of thatis expected from non-traditional sources such as ethanol, biofuels andnatural-gas liquids.The big question for OPEC ministers is whether demand will be strong enoughto mop up those new barrels. A sharp downturn in the U.S. economy wouldricochet to other regions, nudging oil consumption down as well. A number ofinvestment houses are now paring their oil-demand growth forecasts for thisyear. So is the Paris-based International Energy Agency. Traders say thatsome big financial players are also hedging against a continued downturn inprices."Even if economic conditions remain flat in the U.S., spare oil productioncapacity and crude inventories will build up and that is going to putpressure on prices," says Larry Goldstein, an economist at the Energy PolicyResearch Foundation. "That will put OPEC in a tight box."It could be difficult for OPEC to agree formally to lower its productionceiling, especially during a U.S. election year in which high oil prices arealready a campaign issue. Saudi Arabia is particularly eager to keep oilprices from becoming a heated political issue in the U.S. The kingdomsurprised markets at an OPEC meeting last September when it spearheaded anOPEC production increase of 500,000 barrels a day after most analystsexpected the group to simply keeping pumping at the same levels.Some analysts contend that under certain circumstances, OPEC could actuallymove to boost supplies either formally through a consensus agreement, orunder the radar, as Saudi Arabia has done in recent months."Precisely because of heightened recession risks, one could make the casefor pushing more barrels in the market to ease inflationary pressure [and]help sustain demand," says Antoine Halff, head of commodity research atNewedge, a New York brokerage.Adding supply in the face of a bear market, though, would run counter toOPEC's instincts. A big question, if prices do continue to head downward, iswhether OPEC will move to crimp supply to keep them from breaking, say, $70a barrel.Three years ago, when oil was still under $50 a barrel, OPEC ministersworried how the world would react if prices went above $60. But now manyOPEC members -- Iran and Venezuela above all -- have come to depend heavilyon prices being well over $80 a barrel."The longer these prices stay high," says Mr. Goldstein, "the more thesegovernments will feel entitled to that price."