Saudi King Opposes Plan to Cut OPEC Output

The long arm of Saudi Arabian King Fahd was felt at a meeting of oil ministers here Thursday as OPEC moderates sought to neutralize a headline-grabbing proposal by six non-OPEC nations to cut oil exports by 5% in concert with the cartel.

Fahd said there was no need for a production cut by the Organization of Petroleum Exporting Countries because oil prices are climbing on the strength of rising demand for gasoline and other oil products in industrial nations.

Though Fahd’s remarks to a Kuwaiti newspaper reflected the Saudis’ known opposition to a production cut, the timing was seen by some here as a hardening of their position. Oil prices fell in London and New York for a second straight day on the possibility that OPEC won’t agree to cut production.

Brent crude from the North Sea dropped as low as $16.90 a barrel before closing at $17.20 in London, down 30 cents from Wednesday. On the New York Mercantile Exchange, June contracts for West Texas Intermediate, the benchmark U.S. crude, fell 29 cents a barrel to close at $17.98, after having lost 33 cents on Wednesday.

Even strong proponents of a cut in production, notably Iran, spoke publicly of compromising on the 5% target in hopes of salvaging something from this week’s unprecedented talks between OPEC and non-OPEC nations.

“We have to send positive signals to not discourage this cooperation” by the non-OPEC nations, Iranian Oil Minister Gholamreza Aghazadeh told reporters. “The percentage is not too important.”

The 13 OPEC ministers met until 3 a.m. today to consider an offer by Mexico, Egypt, Oman, Angola, China and Malaysia to cut their exports by 5%, or about 185,000 barrels a day, in May and June. The offer, made Wednesday amid much optimistic talk of a new worldwide alliance of oil producers, was conditional on OPEC matching the percentage cut.

However Mexico, spokesman for the non-OPEC contingent, said later that the group could accept “minor modifications.”

And with the cartel eager to court the non-OPEC group, compromise rather than outright rejection of the Mexico-led overture appeared to be the best bet.

One idea being advanced here has OPEC matching the non-OPEC group’s actual barrel reduction rather than a percentage cut, which would take about 675,000 barrels per day from OPEC exports.

When the ministers adjourned this morning, with another session scheduled for tonight, President Rilwanu Lukman of Nigeria, said: “The scene has been set. Things are going well.” He would not elaborate.

Even the temporary and modest reduction proposed by the independent producing nations is fraught with complications, including mutual mistrust. Cartel members pointed out that there is little record of how much crude oil the non-OPEC group has been exporting and no way of tracking their current output.

Of the group, only Mexico discloses what are considered reliable data on crude production and is thought to have honored past pledges to reduce production in support of OPEC.

“This is one of the things that we will discuss,” Lukman said before Thursday night’s closed door meeting. “We don’t have a system for monitoring what non-OPEC is doing.”

Meanwhile, a marked improvement in the price outlook since this week’s meetings were hurriedly called in early April has cooled the ardor of some ministers for trimming oil output. Fahd was voicing the view of an increasing number of energy economists in his published remarks Thursday.

“Oil prices will increase faster if we stick to our production ceiling and if producers outside OPEC understand the merits of limiting their output,” Fahd was quoted as saying.

He was referring to OPEC’s official production ceiling of 15 million barrels a day. The cartel blames rapid increases in non-OPEC production over the past two years for much of the oil glut that has weakened the world prices.

Though the precise impact is impossible to measure, the latest difficulty in the Persian Gulf region and this week’s Saudi decision to sever diplomatic relations with Iran also hang over the oil talks.

The Saudis and fellow pricing moderate Kuwait, major financial supporters of Iraq in its war with Iran, have long been suspected of having diplomatic motivations for opposing Iran’s efforts to cut output and boost prices. Iran depends almost entirely on oil productions for its war money.

Asked about the OPEC implications of the Saudis’ latest diplomatic snub, Aghazadeh said through an interpreter Thursday, “Our effort is (for it) to not have any negative impact.”