A weak dollar and decline in demand will force OPEC to reduce its output, writes Sherine Abdel-Razek Oil ministers from the Organisation for Petroleum Producing and Exporting Countries (OPEC) meet tomorrow in Cairo for their 133rd extraordinary session. They will be discussing production quotas for the first quarter of 2005. The meeting comes in the wake of downward pressure on oil prices which in ten days have lost 17 per cent of their value, the largest collapse in prices since the start of the Iraq war. US light crude eventually settled down $1.52 at $41.46 a barrel, the first time it has broken the $42 floor since late August. Speculation is rife that the 11-member cartel will attempt to shore up prices by decreasing output which has a current ceiling of 27.7 million barrel per day. Mid week transactions saw prices rally from their three-month low following news of the attack on the US consulate in Jeddah -- Saudi Arabia is OPEC's largest producer -- and disruptions in Nigeria where 200 villagers seized three oil pumping stations and prevented the pumping of an estimated equivalent 90,000 barrels per day. The recovery, though, was short lived. Several OPEC oil ministers are thought to favour a reduction in quota ceilings. Kuwait's energy minister, Sheikh Ahmad Al-Fahd Al-Sabah, who will head OPEC's next round, warned that if the slide in oil prices continued a "cut in overproduction" would be inevitable. Including Iraqi output the cartel exceeded its production ceiling of 27.7 million barrels a day by almost three million barrels daily in October, the highest levels of production since December 1979. "The first step is commitment to what OPEC decides and for members to remain within their production quotas," said Iranian Oil Minister Bijan Zanganeh. "Only then can we decide how to proceed, though Libya has already announced it wants an output cut of 500,000 bpd." A weak dollar, combined with forecasts of a warmer than usual winter, makes a reduction all the more appealing. Collapsing dollar prices are impacting on the purchasing power of non-dollar economies such as the Eurozone and Asia. Combined with other pressures to lower production ceilings -- not least the slowing of Chinese demand for oil -- reduced quotas look more or less certain. The price of crude is still up about 30 per cent on the start of 2004, but has fallen from the record high of $55.67 set in late October. OPEC's reference crude basket has already fallen to $34.53 a barrel, not far above the top of the $28-$32 range that Indonesia's OPEC President Purnomo Yusgiantoro identified as fair value for the index. The International Energy Agency (IEA), which advises industrialised nations on energy policy, said recently that oil prices were still too high for economic growth and urged OPEC producers meeting this week to act cautiously. "We think prices are still high. It is not yet time to say they are too low, certainly not," IEA executive director Claude Mandil told Reuters. OPEC ministers are also expected to decide the OPEC basket price range during their Cairo meeting. At its March 2000 meeting OPEC set up a pricing mechanism triggered by the OPEC basket price in an attempt to enhance responses to changes in the international oil market. According to the price band mechanism OPEC basket prices above $28 per barrel for 20 consecutive trading days or below $22 per barrel for 10 consecutive trading days will result in production adjustments. The adjustment was originally automatic, though OPEC members subsequently changed the provision so members could fine-tune at their discretion. Since its inception the informal price band mechanism has been activated only once. On 31 October, 2000, OPEC activated the mechanism to increase aggregate OPEC production quotas by 500,000 barrels per day. The OPEC basket price rose above $28 per barrel on 2 December, 2003, and traded above that level through to 25 November, a period of 253 consecutive trading days. On 21 October the OPEC basket price rose to $46.61 per barrel, the highest since the price band mechanism was established. However, the price band mechanism has not been triggered and there have been no announcements to date that it will be activated. Up to 25 November the OPEC basket price has averaged $35.98 for 2004. Since last meeting in Vienna OPEC nations increased production to 27.7 million barrels per day, its highest level for 25- years. The only way now, perhaps, is down.
