WSJ(1/31) OPEC Holds Output Quota Steady

Many OPEC officials now are arguing that 2005 is likely to be a landmark year
that will determine whether the world is in for a lasting period of higher
prices. Mr. Khelil, the Algerian minister, said that for now, “the probability
of lower prices this year is less than the probability of higher prices.”
01-30 16:37: WSJ(1/31) OPEC Holds Output Quota Steady

DJ WSJ(1/31) OPEC Holds Output Quota Steady

(From THE WALL STREET JOURNAL)
By Bhushan Bahree

VIENNA — In the latest sign that it is aiming to support oil prices at
levels that were until recently deemed sky high, OPEC yesterday decided to
leave its petroleum-output quotas unchanged and suspended a price-gauge system
that helped to contain the cost of oil for years.

With oil prices near $50 a barrel, the cartel empowered its president to seek
a quick change in output limits to prevent prices from falling or rising
sharply from current levels in coming weeks, if supply imbalances slam the
market before the group meets again in mid-March. The unusual move gives the
president power to quickly put in place a production change without a full
negotiating session, though member nations would be consulted.

The decision to keep output unchanged in the face of strong oil prices
appeared to further support the notion, as reported, that the Organization of
Petroleum Exporting Countries is seeking to maintain a price well above $40 a
barrel for U.S. benchmark oil. Prices were at the $20 level for most of the
prior decade, but last year they punched through $40 and have been above that
level since.

“OPEC has effectively set a new floor price of $40 a barrel, and they will
defend it,” said Roger Diwan, an analyst at PFC Energy in Washington, D.C., who
was in Vienna to observe the meeting. “The price of oil will be higher in 2005
than in 2004 because of supply and refining bottlenecks. The risk is on the
upside.”

Behind the scenes, some OPEC ministers are voicing anxiety over the cartel’s
ability to contain a potential price surge this year. They note that markets
could soar if Chinese demand jumps, as it did in the spring, or if there are
production problems in Russia or Iraq, giant exporters whose ut remains at
the mercy of volatile domestic politics. While OPEC members are enjoying banner
revenue, the cartel stands to lose if oil prices rise high enough to prompt
conservation or a shift to alternative fuels in consuming nations such as the
U.S.

Those concerns were outlined by Algeria’s oil minister Chakib Khelil, a
former president of the cartel. He warned that the probability of a price
explosion this year is high and that exporters are worried that prices could
shoot up to $55 to $60 a barrel or more for U.S. benchmark crude. “Those are
levels most of us are uncomfortable with,” he said.

Others in OPEC argue that the world economy can withstand pricey oil and they
are eager to reap the windfall. Edmund M. Daukoru, Nigeria’s presidential oil
adviser, told reporters he is comfortable with prices ranging from $45 a barrel
to $55 a barrel.

Ali Naimi, the Saudi oil minister who is the de facto leader of OPEC, and
cartel President Sheik Ahmad Fahad Al Ahmad Al-Sabah, who is also Kuwait’s oil
minister, said oil priced at $50 a barrel isn’t causing any damage to the world
economy. Sheik Ahmad said some analysts reckon that even $60 oil would have
little impact on the global economy.

These comments suggest OPEC no longer is afraid that prices at current levels
will hamper demand for oil or prompt large-scale development of oil fields or
alternative sources of energy by non-OPEC countries. A year ago, OPEC ministers
routinely fretted about prices rising to $40 or more. At various times since
then, OPEC officials have justified rising oil prices by citing the lower value
of the dollar, the currency in which internationally traded oil is priced, and
inflation.

The Saudi and Kuwaiti ministers didn’t specify the level of prices at which
they felt the world economy might be damaged. But they, along with others in
OPEC, opted not to risk pushing prices higher this weekend by pre-emptively
seeking production cuts on the assumption of a coming seasonal decline in
demand. “With prices where they are, cutting production now could be seen as a
provocation,” said Nordine Ait-Laoussine, a former Algerian oil minister who
was observing this weekend’s meeting.

On Friday in New York, U.S. benchmark crude futures for March delivery
settled at $47.18 a barrel, down $1.66, as fears faded that the cartel would
cut output to support prices.

Many OPEC officials now are arguing that 2005 is likely to be a landmark year
that will determine whether the world is in for a lasting period of higher
prices. Mr. Khelil, the Algerian minister, said that for now, “the probability
of lower prices this year is less than the probability of higher prices.”

Unable to decide the new price levels it wants to target publicly, OPEC
yesterday also scrapped its price band of $22 to $28 a barrel for its basket of
crudes. That basket, which tends to trade at a discount of $5 a barrel or more
to the U.S. benchmark, was at $41.88 a barrel Friday.

OPEC is producing about 29 million barrels a day of oil, or more than a third
of the world’s total crude output of 84 million barrels a day.

To enable quick supply changes in the weeks ahead, the ministers empowered
the cartel’s new president, Kuwait’s Sheik Ahmad, to adjust members’ output
quotas after consulting with ministers by phone ahead of the group’s next
meeting, in the Iranian city of Isfahan in mid-March. Sheik Ahmad will keep
track of changes in prices and inventories in consuming countries.

(END) Dow Jones Newswires

01-30-05 1937ET

DJ info:
N/DJCS,N/DJOS,N/OSCM,N/OSEN,N/OSTR,N/CMD,N/DJSS,N/DJWI,N/JNL,N/OPC,N/PET,N/WLS

KEYWORDS: FSN47033 CET ENERGY GENERAL

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