The distinct possibility of current market turmoil hitting energy demand will stop OPEC ministers from increasing production quotas next week, analysts said.
If OPEC was to raise supply at a time when prices are vulnerable to weakness because of increasing risk aversion, oil would almost certainly fall, they said, making a production increase a less attractive option for ministers whose income
relies on the commodity.
Twenty-one out of 23 analysts polled by Thomson Financial said the cartel was likely to keep production levels unchanged at its September 11 meeting. Just two analysts said OPEC might increase production levels.
"OPEC is like everyone else. It is going to wait for more clarity before they make any decisions on policy," said Alaron analyst and trader Phil Flynn.
In recent months, fears that defaults in the US subprime sector would spill over into the wider economy and trigger a global credit crunch have raised concern energy demand might end up taking a hit.
Equity market weakness has sparked several rashes of risk aversion as traders fled from commodities, often seen as risky assets, towards safer bets. Selling off to raise cash to cover losses elsewhere also caused oil prices to fall.
The world's top two oil benchmarks, for example, have lost some 5 pct since the start of August, from the highs. "They're (OPEC) afraid the credit crunch could get bad and kill demand," said Peter Beutel, president at energy risk management firm Cameron Hanover. "I don't think they'll be keen (to raise quotas)."
OPEC accounts for more than a third of global supply. The cartel itself has also shown no willingness to raise production levels with ministers regularly quoted as saying current supply levels are healthy despite calls from other industry bodies who say the market is under-supplied.
In the near term, OPEC believes global demand in the third quarter of this year will grow by 1.5 mln bpd to average 85.68 mln bpd. For 2008, OPEC sees demand at 87.06 mln bpd.
By comparison, the International Energy Agency (IEA), an advisor to 26 industrialised nations of the OECD region, expects world oil product demand to grow by an annual 1.8 pct to total 86 mln bpd in 2007. For 2008, it sees demand growing by 2.5 pct to total 88.2 mln bpd.
The IEA has unsuccessfully made several calls on OPEC to lift production.
"If the cartel is of the opinion, which I believe they are, the market is well supplied, then there is little incentive for them to ramp production up," said Stephen Schork, president of The Schork Report.
Commenting on recent jitters, Schork said: "The funds are still long. OPEC is well aware of this. Thus they don't want to give jittery fund managers any excuse to liquidate their remaining length."
OPEC will meet again on November 17 and has a meeting scheduled for December 5.
(AFX News, 03/09/2007)