Opec Leans Toward Production Quota Rollover

Opec appears to be leaning more firmly toward a simple rollover of its current quota at today's ministerial meeting. The oil producer group is still anxious about the risk of excess supply in the second quarter dragging down prices from recent lofty levels. But there is also a strong sentiment that demand is robust, supply is about right and that fear of a possible price meltdown is exaggerated. Some ministers suggested on arrival in Algiers that production cuts would have to start sooner rather than later, both to restore some quota discipline and to keep global supplies on a tight rein in the crucial second quarter, when they expect demand to slacken for seasonal reasons. But most agree that Opec can keep prices within its $22-$28 price target by adhering to its 24.5 million barrel per day ceiling, which has been ignored since it came into effect last November, rather than by formal cuts to the ceiling itself this week. Opec's top producer and most powerful member, Saudi Arabia, portrayed the group's recent practice of producing significantly above quota when oil prices were so high -- while remaining ready to react to a possible a dip in demand -- as a sensible approach to a jittery market. "We took a decision [in September] to reduce the ceiling, but we saw the market heat. So what does a sensible organization do?" ventured influential Saudi Oil Minister Ali Naimi "There is the formal and the informal. We did the informal work and a little bit leaked -- to lower the heat in the market." Naimi would not be drawn on the likely outcome of today's discussions. But a Gulf source familiar with Saudi thinking told International Oil Daily that Opec's best option could be to carry on with its more agile approach to market management by continuing to adjust supplies to the market informally. "Maybe we need to make an adjustment by getting everyone back within quota and by cutting from actual production but not from the ceiling," the Gulf delegate said. "If we do need to cut production at some point, it should be temporary. Maybe it should be in one quarter or two at the most and it need not be formal as in a change in the ceiling." Not all share this sanguine view. Some ministers consider that production over their individual quotas by the Opec 10 -- which excludes Iraq -- needs to be addressed urgently in readiness for the critical second quarter. According to Energy Intelligence estimates, the Opec 10 produced 25.9 million b/d in January, versus a quota of 24.5 million b/d. Iraq produced 2.1 million b/d, exporting about 1.6 million b/d. "We have to be concerned about the second quarter," acting Opec Secretary General Purnomo Yusgiantoro of Indonesia told reporters Monday. "I really believe that most forecasts were and are wrong. There was no stockbuild in 2003. There will not be one in the first quarter," the Gulf source said. "Demand is strong, especially in the US and China, and there will be no 1.5 million b/d non-Opec increase in production. If they are lucky, they will get 1 million [b/d], maybe. Taking all this into account, there are no major challenges facing Opec right now or even for much of this year if we manage it right." By contrast, Purnomo hinted strongly at the need to consider cuts in the coming weeks to support Opec's price target, which remains $25/bbl for the Opec basket of crudes. "I think Opec is fully aware of what we need to do to face the market … especially the second-quarter drop in demand," he said. Kuwaiti Oil Minister Shaikh Ahmad Fahad al-Sabah struck a more hawkish tone, calling for instant cutbacks in Opec output, to be followed by the announcement of further cuts in March. "I think we'll have to cut our production by 1 million-1.5 million b/d [before March]. Everybody has overproduced," he said. "We need [to cut] another 1 million b/d in March." But the Gulf source said most of the market forecasts over the past year have been wrong, painting a more bearish picture of fundamentals than what actually transpired. Analysts on site in Algiers saw the variety of postures struck by ministers as a reflection of their determination to keep global inventories on a tight leash and to support the bullish market sentiment. "The trick for Opec is to allow inventories to build enough so you are comfortable moving into a high-demand period, but not so comfortable that they lose control," said Yasser el-Guindi of New York-based Medley Associates. Karen Matusic and Peter Kemp, Algiers