OPEC ready for deepest oil cut to rescue prices

By William Maclean and Barbara Lewis William Maclean And Barbara Lewis – 39 mins ago

ORAN, Algeria (Reuters) – OPEC oil ministers meet on Wednesday to remove a record 2 million barrels per day from oil markets as they race to balance supply with the world's collapsing demand for fuel.

The 12 members of the Organization of the Petroleum Exporting Countries are also aiming to build a floor under prices that have dropped more than $100 from a July peak above $147 a barrel. They are due to meet at 3:30 a.m. EST.

Saudi Arabia, the world's biggest oil exporter, has led by example -- reducing supplies to customers even before a cut has been agreed to help push prices back toward the $75 level Saudi King Abdullah has identified as "fair."

Ali al-Naimi, the kingdom's oil minister, was first to publicly call for curbs of 2 million bpd ahead of the meeting.

That figure was swiftly endorsed by others in the group that pumps more than a third of the world's oil. An OPEC delegate told Reuters there was consensus for a cut of that magnitude starting from Jan 1.

"A minimum of two million we think needs to be cut so we can balance the market," Iraqi Oil Minister Hussain al-Shahristani told Reuters.

"It's in everyone's interest for supply and demand to be better aligned," Nigerian Minister of State for Oil Odein Ajumogobia told Reuters. "They are clearly not at the moment."

The expected cut, the third this year, would bring a total reduction in OPEC supply to four million bpd, nearly a five percent cut in world oil supplies.

Oil below $50 is uncomfortable for all in OPEC, but especially for Venezuela and Iran which are dependent on higher prices to fund ambitious domestic programs.

Oil on Wednesday was trading slightly firmer, just above $44 a barrel.

A limited recovery in prices would put a bit more strain on a recessionary global economy, it may help pull the world back from the brink of deflation -- a growing source of concern, analysts said.

"We are in harmony, we know the situation is difficult," OPEC Secretary-General Abdullah al-Badri said on Tuesday.

"We have to reach a difficult decision, but we're going to reach it. I think 2 million is the most likely cut."

Those outside OPEC are expected to cut up to 600,000 bpd in concert with the producer group. Russia, the biggest non-OPEC oil exporter, may contribute about half that volume.

DISCIPLINE

Saudi Arabia's position was laid out by Naimi when he arrived in Algeria on Tuesday.

"Let me tell you this -- this is Saudi Arabia -- since August to November we reduced 1.2 million barrels per day from 9.7 to 8.5," he said.

Reuters reported last week that Saudi Arabia's biggest customers would receive less oil in January -- implying the kingdom had already factored in another OPEC reduction.

The Saudi oil minister confirmed that.

Gulf neighbor Kuwait said it, too, was wasting no time in cutting January supplies ahead of an expected cut.

To have a lasting price impact, any OPEC deal must to be strictly observed.

According to independent observers cited in OPEC's monthly report on Tuesday, the group's compliance in November to existing cuts was only just over 50 percent.

Analysts said deeper cuts would further test discipline in the group. That restraint would be needed to slim down growing world oil stocks.

A slump in consumption has lifted oil inventories in OECD industrialized nations to the equivalent of nearly 57 days of forward demand, a measure OPEC closely monitors. The industry norm for this time of year is about 52.

Russia, the biggest non-OPEC exporter, sent a high level delegation to observe the Oran meeting.

Azerbaijan said it could also contribute to any OPEC decision but Mexico in a statement on production plans made no offer to cut output.

Mexico, Russia and Norway worked with OPEC in 1999 to revive prices that had fallen below $10 a barrel and again in late 2001 to pull prices back above $20 a barrel.

Output from non-OPEC producers is declining and proclamations of cuts served to mask the effect of aging fields and a lack of investment, analysts said.