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28 May, 2009 13:39

OPEC holds production levels despite crude glut

OPEC has decided not to cut output, despite record levels of crude in inventories and weak demand forecasts, with some cartel members believed to have ignored previous commitments to cut.

OPEC sees no need to change its guidance to oil exporters – even though oil prices are hovering around a six-month high of $63/bbl. At their meeting in Vienna members agreed stick to the current levels of output, despite oversupply, with OPEC Secretary General Abdalla Salem El-Badri, saying the organization is looking to foster economic recovery.

”The market is oversupplied, but we are seeing a light in the end of the tunnel. There is a slow recovery and we don’t want to send the wrong signal to the economy.”

With recent production cuts of 4.2 million barrels per day, OPEC members lost revenues totaling $400 million Al Badri says.

Some countries can’t withstand such losses and have exceeded their quotas – undermining OPEC’s authority, but Aleksey Kokin, Analyst at Metropol Investment, believes there is little the Saudi's can do.

”Even Saudi Arabia was not complaining, but the real culprits are not Gulf states – its probably Iran and possibly Venezuela. Compliance is more likely to decline whatever Saudi Arabia says. The only thing Saudi Arabia can do to punish the detractors is by flooding the market with oil. I doubt they will go that far.”

As OPEC quotas are no longer a cap, exporters outside OPEC want an alternative oil agency.

Italy’s ENI proposes a regulator to manage spare capacity – and encourage countries to invest in efficient production – along with a fund to compensate producers if oil prices plummet. Russia’s Energy Minister said Moscow is interested in the proposal but needs time to analyze it.

Meanwhile experts see no reason for Russia to join any regulatory body. They say currently Russia’s daily production is flat year-on-year and the country is benefiting from restraint of Saudi Arabia and other OPEC members.