OPEC may call stop to automatic output increases

"I think market fundamentals do not dictate another increase this year," said Iranian Oil Minister Bijan Zanganeh.

Oil remains well above the group’s preferred $22-$28 a barrel range, but OPEC is more worried about a post-winter price collapse than the impact of high energy costs on inflation.

Support was growing for a suspension of OPEC’s troublesome automatic price band trigger that at the start of November released a small dose of extra supply when cartel crudes stayed over $28 for 20 days.

That failed to push crude below the $28 threshold and, unless the market dips sharply, the rules of the price band device would mean another increment before the end of the month.

"We have to review it with our colleagues and see howe ffective it has been," said Kuwaiti Oil Minister Sheikh Saud Nasser al-Sabah. "We have tried it once and it had no effect on the market."

"If prices stay high because of factors unrelated to the supply of crude it would be irrational to keep triggering production increases," added an OPEC delegate.

Ministers blame refinery and shipping bottlenecks, market speculation and consumer taxes for stubbornly high prices. Far from lifting output again, ministers now want to plan the timing of a production cut to ensure prices don’t collapse next year below the preferred floor of $22 a barrel.

"We will not take a decision to cut production at present, but if (a price fall) happens in the coming months we will take a decision to cut production," OPEC secretary-general Rilwanu Lukman said on Friday.

INVENTORIES ON THE MEND

Aggregate OPEC output increases this year of 3.7 million barrels daily, 16 per cent, have yet to show up fully in industry stockpile data.

The International Energy Agency said this week that inventories at the end of September left serious concerns about winter heating oil supplies in the West.

But while stockpiles fell alarmingly during the fourth quarter of 1999, OPEC’s additions should see a small contra-seasonal stockbuild during that period this year, wiping out a year-on-year deficit.

Industry analysts believe crude flows now are sufficient to replenish the inventory deficits and leave importing nations more comfortably placed once the peak winter demand season is completed.

The prospect has raised alarm among some OPEC nations who want to start preparing now to prevent any severe downward spiral in prices.

As ever, OPEC’s leading producer Saudi Arabia will be key to any shift in policy. The Kingdom appears more relaxed than some fellow member states.

"Fears of a price collapse are not warranted," said an OPEC delegate on Saturday of Saudi thinking. "Prices will fall lower within the ($22-$28) target range on average next year," the delegate said.

Others are projecting world supply outstripping demand by a significant margin next year and believe an output cut is inevitable with only the timing still to be decided.

Algerian Oil Minister Chakib Khelil expects the group to agree to meet again in January to consider a supply cut instead of waiting for a scheduled March conference.

"If they set another meeting for January or February the market will be reassured that the output cuts will come in time," said Anne-Louise Hittle of Cambridge Energy Research Associates.

"March would make it more risky. There might be a period of weakness before the impact of the cuts would hit."

OPEC on Sunday also will give another airing to the thorny issue of who should succeed Lukman as the group’s chief administrator. No clear favourite has merged among the candidates from Saudi Arabia, Iran, Iraq and Libya. Selection requires unanimous support from 11 members.