As Oil Prices Fall, OPEC Holds Output Steady

By Steven Mufson
Washington Post Staff Writer
Thursday, December 6, 2007

Oil prices jumped early yesterday after the Organization of the Petroleum Exporting Countries announced it would not increase oil production but ended lower after an Energy Department report showed a rise in U.S. fuel inventories.

The price of a barrel of light, sweet crude for January delivery stood at $87.49 at day's end on the New York Mercantile Exchange, down 83 cents from the previous day.

A nearly $12-a-barrel drop in crude oil prices over the past two weeks and the murky outlook for the U.S. economy had eased the pressure for OPEC to boost output, even though oil prices are up 40 percent from a year ago and have been hovering around inflation-adjusted record levels.

Many oil experts said prices would continue to decline in the coming weeks because of relatively weak demand for the high-priced natural resource and because the Bush administration's new National Intelligence Estimate (NIE) about Iran's nuclear program might ease oil market anxiety about a possible U.S. military strike.

"Markets are weakening and we have not yet seen the impact of the earthquake that the NIE is," said Roger Diwan, a partner at PFC Energy, a Washington consulting firm. He said the intelligence estimate would "help prices erode as [the] risk is gone of unilateral strike."

In futures markets, however, prices remained high for oil deliveries in coming months. Oil for June delivery was $86 a barrel, only $1 less than the January price.

OPEC issued a statement yesterday saying that it had decided to leave production "unchanged for the time being." It said, however, that in light of volatile oil prices and "the need for extreme vigilance in assessing the market," OPEC will meet in Vienna on Feb. 1. The organization vowed "to take every measure deemed necessary to keep market stability."

Just three weeks ago, some Saudi officials had said an increase in oil production might be needed to blunt the relentless rise in prices since September. But Saudi Oil Minister Ali al-Naimi has repeatedly said that supplies are adequate and has blamed high prices on an influx of money from hedge and investment funds.

"I think the Saudis are in a bind," said Edward Morse, chief energy economist at Lehman Brothers. "Clearly they did not wish to upset OPEC unanimity by doing something on their own." He said that with oil prices dipping below $90 a barrel and economic analysis suggesting a softening market, "conditions entrenched the position of the price hawks in OPEC who never wanted to produce more oil in the first place."

Adam Sieminski, chief energy economist at Deutsche Bank, said OPEC was still worried about repeating the mistake it made a decade ago at its meeting in Indonesia, when it boosted production just as Asian economies swooned. "Shades of Jakarta," he said, referring to the Indonesian capital. "Adding oil into the market just as Asian economies were about to tank, that's how they got $10-a-barrel oil, and they weren't going to repeat that mistake."

Despite OPEC's vow to hold output at current levels, some experts expect OPEC to produce more oil, as has often happened when members of the cartel exceed production quotas. Morse said that extra amount could be 250,000 to 500,000 barrels a day from Persian Gulf countries.

In addition, security conditions in Iraq might permit a slight but still-significant increase in production. Iraq does not have a quota at the moment.


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