Experts Foresee Further Cuts in Opec Output

DUBAI - Oil exporters will have to either raise compliance rate on output cuts or agree on further reductions to ward off the impact of a new stock build up, industry experts warned on Monday.

“There is evidence of a new stock build up, which might require either a higher Opec compliance rate or a new cut in production,” said Dr Fereidun Fesharaki, Chairman of FACTS Global Energy.

Speaking at the Middle East Petroleum and Gas Conference, which opened in Dubai on Monday, Dr Fesharaki said if price dipped further, Organisation of Oil Exporting Countries, or Opec, would certainly be willing to cut another 1-1.5 million barrels per day. “All these cuts result in a large Opec capacity surplus, most of which is in Saudi Arabia,” he warned.

Dr Fereidun Fesharaki, Chairman of FACTS Global Energy, said without Opec production cut, the price of oil would have been in the low $20s. “Opec has done a credible job so far, but is it enough?”

Dr Fesharaki, who was the 1993 President of the International Association for Energy Economics, or IAEE, said expected oil inventories to dwindle and the price to rise to $55-60 per barrel by the end of 2009.

Forecasting a slow global economic recovery, Dr Fesharaki said the most optimistic case would be a turnaround by end of this year, while the worse case scenario would be a recovery by 2012-13. “For oil industry, it will be a slow recovery with prices lingering in the $40-60 range, perhaps till end-2010. However, the three pillar of demand — China, India, and the Middle East — look strong enough to carry the global market.

He said even without a crisis, a surplus refining capacity would have emerged. “Now it is just worse. Weak demand and too much capacity have resulted in substantial overcapacity and weak margin,” he said.

Although many refinery projects are getting cancelled or postponed, those already under construction will keep the pressure on the margins for a number of years, Dr Fesharaki said. “Only closure in Japan, the US, and Europe can bring the margins back,” he said.

Surplus capacity and further downward pressure on oil price may prompt some Opec members to violate reduced production quota, said Jorge Montepeque, Global Director of Platts, an oil industry publication. “It is very unlikely that prices will hold at the current $50 per barrel level as demand is expected to further fall in the coming months. April and May, which are the low demand months, are very critical in determining the future trend,” he said on the sideline of the conference.

The International Energy Agency said it did not expect a recovery in oil demand until early next year, and warned a lack of investment could cut non-Opec supply capacity by 360,000 barrels per day in the next 18 months.

“Current declines in investment will have an impact on capacity and capacity declines could already be underway,” Jones said at the conference.


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