OPEC members must show greater discipline and produce within their output quotas for crude if they hope to forestall a sharp decrease in oil prices when seasonal demand falls this spring, the group’s president said Monday.
Representatives of the Organization of Petroleum Exporting Countries were gathering in Algiers to discuss what action to take to keep crude prices from tumbling during the April-June quarter. OPEC president Purnomo Yusgiantoro refused to rule out a decision to cut the group’s output ceiling of 24.5 million barrels a day when the delegates meet formally on Tuesday.
“If we don’t handle it well in the second quarter, the price may just be dropping rapidly,” Purnomo told reporters at an Algerian government-run conference center.
OPEC pumps about a third of the world’s oil. Purnomo said the group fears that global demand for oil will decline by as much as 2.5 million barrels a day during the second quarter, but its members are currently producing about 1.5 million barrels a day above their output ceiling.
In recent months, this excess output was not a problem because prices were high, Purnomo said. Demand, especially from China, has exceeded expectations, and the market’s uncertainty about future crude exports from Iraq has helped underpin the market.
However, prices have eased somewhat since January, with OPEC’s benchmark blend of crudes at $28.20 a barrel on Friday compared to OPEC’s targeted range of $22-28.
Algeria’s oil minister Chakib Khelil said OPEC must “definitely” take action to prevent a further, substantial decrease in prices. He noted that overproduction was of particular concern.
“A decision will be made to rein in this extra production at least through better discipline,” he told reporters.
Iraqi oil minister Ibrahim Bahr al-Uloum said the group should not change its output target but agreed that member countries ought to show greater restraint.
“We try to ask the OPEC countries to stick to their quotas,” Ibrahim Bahr al-Uloum told reporters.
Several other oil ministers, speaking in recent days, have also played down the prospects of a formal cut in production.
“It wouldn’t be logical. OPEC is very much in control of the market,” said Yasser Elguindi, an analyst at Medley Global Advisors, a New York consultancy.
However, OPEC has caught markets off guard before with a pre-emptive decision to cut. In September, it defied expectations and announced a 900,000 barrel decrease in its output ceiling, starting in November.
OPEC left its ceiling unchanged at 24.5 million barrels in December, and some analysts predict the group will postpone a formal cut until its next scheduled meeting on March 31.
OPEC is haunted by the consequences of its decision in December 1997 to increase production just before a financial crisis in Asia that sent oil prices plummeting to $10 a barrel. The group has intensified its efforts to micromanage production, and its delegates met seven times in the last year alone.
Some analysts argue that OPEC has overstated the risk of faltering demand and plunging prices in the second quarter.
In futures trading Monday on London’s International Petroleum Exchange, North Sea Brent crude for March delivery rose 19 cents to $29.02 a barrel.
Al-Uloum, the Iraqi minister, said he hoped that Iraq would boost its oil production to 2.8 million barrels per day by the end of March, after having averaged 1.6 million barrels in January.
Iraq is currently exempt from OPEC’s quota regime while it rebuilds its postwar economy.
