LONDON/DUBAI: Shrinking fuel demand and battered oil prices have almost certainly convinced OPEC it needs to agree another big cut when it meets in Algeria next week. The issue is how deep that cut should be. Leading exporter Saudi Arabia has already told its biggest customers they will in January receive quantities of oil that imply it has factored in another curb, trade sources have said. It also broke years of silence on whether it had a target price by setting a goal last month of $75. That is far above the market, which on Friday was less than $45 a barrel for benchmark US crude, but announcing extensive cuts traders would not believe could be counter-productive. OPEC could prefer instead to keep holding regular meetings to agree progressive reductions. "I think OPEC will cut by 1-1.2 million barrels per day (bpd). I don't think it will be more, one OPEC insider said. "I think they will be meeting more regularly now until they see they are back in control. With the market already assuming a reduction of around 1.5 million bpd, others said OPEC could seek to surprise. "A surprise would have to be above 1.5-2 mln bpd, which is what we believe they are talking about, said David Kirsch of Washington-based PFC Energy. The other way to increase its impact is to win the backing of non-OPEC oil producers. In the past, any collaboration has been unconvincing and as non-OPEC output is stagnating in any case because of field maturity and underinvestment, lower production might not be viewed as deliberate policy. But the depth of the price fall has focused all producers on the need for action and Russia, the biggest non-OPEC exporter, is sending its energy minister and its deputy prime minister to the talks in the western Algerian town of Oran on Dec 17. "Hopefully Russia will join in as well, said a Gulf OPEC delegate. At informal talks in Cairo last month, OPEC ministers acknowledged the need to cut, but did not agree on how much. Their hesitation helped to knock another $10 off the oil price. Since early September, OPEC has said it would remove around two million bpd from the market. Saudi Arabia has reined in supply by more than one million bpd from peak output estimated to be around 9.65 million bpd in August after the kingdom unilaterally increased production to try to cool prices that hit a record above $147 in July. Oil has since fallen by more than 70 percent to a low of $40.50 last week as global economic recession has taken chunks out of demand. The US government's Energy Information Administration said this week it expected global oil demand to shrink this year and next year. That would mark the first time since the 1980s consumption had contracted for two years running. The Paris-based International Energy Agency, which advises 28 industrialized countries, said it still forecast demand would grow in 2009, but expected it to contract this year. As demand has dwindled, the IEA said stocks have risen to the equivalent of 56.8 days of forward demand - a measure OPEC monitors closely - well above the five-year average. Given the extent of the global economic downturn, whatever the cut it could take time to take effect. Deep cuts are more difficult to enforce as they require discipline from all OPEC members and could mean the group would have to haggle over their individual output targets as the best way to control compliance. "I think they will have to agree a new quota system even if it is a headache, the OPEC insider said. Aside from practicalities, too sharp a cut could be politically vexed when lower fuel prices are one of the few sources of relief for hard-pressed consumer nations. "The challenges facing the global economy are bigger than OPEC, said Antoine Halff of Newedge brokerage. "Producers should accept that in this environment a loss of revenue might simply be inevitable. They might also consider regarding such a loss as their contribution to the global rescue package.
