OPEC May Act to Hold Cost of Oil Above $40

A key OPEC minister said Thursday that the group would cut output next year in a bid to keep prices from sliding, and his comments had an effect, helping push oil above $42 a barrel in New York trading.

Sheik Ahmed Fahd al Ahmed al Sabah of Kuwait said ministers had decided to trim excess production to bring the group’s actual output in line with its official ceiling of 27 million barrels a day. That would remove more than 1.5 million barrels a day from the world market.

“Everyone has committed.... Everyone is looking to cut overproduction,” Ahmed Fahd said in Cairo, where the winter conference of the Organization of the Petroleum Exporting Countries is scheduled to convene today. He spoke after a meeting of OPEC’s production committee.

Oil prices have fallen back since they reached a record $55.17 a barrel in October. On Thursday, the oil contract rose 59 cents, or 1.4%, to $42.53 on the New York Mercantile Exchange.

If OPEC does as Ahmed Fahd suggested it would, it will be “somewhat supportive for oil prices,” said Thomas Bentz, senior energy analyst at BNP Paribas Commodity Futures Inc. “I don’t think it’s sending prices up to $50, but I think it could prevent them from falling below $40.”

Although oil is trading for 34% more on Nymex than it was a year ago, the steep decline in the value of the U.S. dollar, the currency in which crude is denominated, has eaten into producers’ revenue.

Beyond that, OPEC members seem to feel that the world can handle $40-plus oil, said Amy Myers Jaffe, energy fellow at Rice University’s Baker Institute. OPEC’s thinking, she said, is that the price has soared since last year, “nothing happened, demand didn’t crater, so why not stick with this price?”

Philip K. Verleger Jr., an industry consultant in Aspen, Colo., agreed, to a point: “What they’ve observed is that the world economy in the short term has been less sensitive to oil prices. Whether or not that’s the case in the long term is another question.”

This year, OPEC has hiked output to the highest level in a quarter of a century to accommodated rising demand in the U.S. and China and to make up for disruptions in exports from Iraq, which is an inactive OPEC member. Last month, OPEC powerhouse Saudi Arabia alone pumped about 9.72 million barrels a day, exceeding its quota by about 945,000 barrels -- representing a big chunk of OPEC’s total overproduction.

In Cairo, Saudi Oil Minister Ali Ibrahim Naimi signaled that the Saudis might not be wholeheartedly behind an output cutback, saying he was happy with market conditions. He added, however, that unspecified moves were necessary to stabilize the market.

Among others in the group, the pro-cutback sentiment has grown as prices have fallen. The decline on Nymex was a reflection of a number of factors, including replenished inventories, high production by both OPEC and non-OPEC countries, relatively mild weather in the Northern Hemisphere and less of the speculative futures buying that led oil to unprecedented levels in October.

“I think the price decline was expected, but the speed of the decline was a surprise,” the United Arab Emirates’ oil minister, Mohammed ibn Dhaen al Hamli, said in Cairo. Added Iranian Oil Minister Bijan Namdar Zanganeh: “All the OPEC suppliers want to manage the market and not to witness a shock.”

Consuming nations have urged that OPEC not pull back on output. “Given where inventories are, OPEC production probably needs to stay about where it is,” said Guy Caruso, head of the U.S. government’s Energy Information Administration. “We think on average we’ll need more OPEC crude next year than we got this year.”

The agency said in a long-term energy outlook issued Thursday that crude was likely to cost about $35 a barrel in 2025, not counting inflation. Last year, when crude was selling for about $32 a barrel, the agency predicted in its outlook that the price would be about $27 a barrel in 2025.

Thursday’s price move on Nymex was influenced in part by a U.S. government report that natural gas stocks fell by more than was expected last week. Winter heating fuel inventories in major consuming countries are low, and analysts have warned that they might be insufficient if the northern winter becomes severe.

Bloomberg News and Associated Press were used in compiling this report.