Saudis triumph in fight against oil production cuts: Opec agreement to remain in force for the rest of the year, but analysts are not expecting another slide in prices

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The Independent Online
Saudi Arabia, Opec's dominant oil producer, held out against pressure for production cuts at the group's weekend meeting in Geneva, forcing oil ministers to agree to leave their production agreement in place until the end of the year.

But, rather than a repeat of the sharp slide in oil prices that followed Opec's last meeting in November, many market analysts see only a temporary dip this time.

One reason for the relatively hopeful outlook is that oil prices have already taken a severe beating. Benchmark North Sea Brent crude fell below dollars 13 a barrel earlier this year, the lowest outright level for nearly six years and a 20-year low if inflation is accounted for.

Oil traders say that a rollover of Opec's production quotas has been expected for weeks and is already reflected in prices.

Indeed, there have been recent signs that prices may be lifting off the bottom, with Brent crude for May delivery rising back above dollars 14 a barrel at the end of last week. Cold weather in the US and Europe spurred demand early in the year and depleted oil stocks, while supply from Russia has been erratic with the recent tanker disaster in the Bosphorus causing the latest disruption to exports.

According to the Centre for Global Energy Studies, a London- based think tank headed by the former Saudi oil minister Sheikh Yamani, the oil industry is likely to require an extra 1.5 million barrels of oil a day as it replenishes stocks over the next three months.

Oil prices, which have been in a long decline along with other commodity prices, look to be nearing their nadir, says Robin Griffiths, a chart analyst at James Capel.

Precious and base metals, the first commodities to go into retreat, have recently rebounded and been followed by other commodities.

But the CGES points out: 'The oil market remains finely balanced (and) firmer oil prices than expected will strain Opec's cohesion.'

Many Opec members have seen their budgets squeezed as oil prices have plummeted. The tensions were evident at the weekend meeting, with Iran and Nigeria among those pushing for a production cut to bolster prices. Saudi Arabia has argued that to cut production would only allow non-Opec producers a chance to steal market share.

North Sea producers have been cited as among the main culprits for the oversupply in the world market. Having peaked in 1987 at 3.72 million barrels a day and fallen into decline, improvements in technology have helped lift production to more than five million barrels a day this quarter. That is expected to reach a record 5.5 million later this year.

Saudi Arabia is hoping that a pick-up in world consumption later this year will close the gap between supply and demand. The emphasis at the Opec meeting was on strict observance of individual countries' production quotas, something that has proved almost impossible to achieve in the past.

Opec's output is about 25 million barrels a day compared with an official ceiling of 24.52 million. Despite its statement that it 'will not tolerate any violation of this agreement', no effective way to enforce adherence has been proposed.