Saudis may bigfoot OPEC and hike output

OPEC may formally resist adding production, although Saudi Arabia may put more supply on the world market on its own.

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NEW YORK (CNNMoney.com) -- OPEC may not officially boost output at the conclusion of its meeting Wednesday in Abu Dhabi, but that doesn't mean the world won't get its oil.

As recently as a few days ago, analysts generally agreed that the cartel was likely to increase production by at least 500,000 barrels a day. And the oil markets reacted: Crude prices fell from nearly $100 a barrel two weeks ago to below $90 now.

But now that increase is less certain to happen.

A number of factors argue against an increase in OPEC production: a deteriorating economic outlook and slackening demand in the United States, a sudden plunge in oil prices below $90 a barrel and resistance by several cartel members.

"If I had to put my money on it, I'd say no change," said Leo Drollas, chief economist at the London-based Center for Global Energy Studies.

Still, like other analysts, Drollas said that even if OPEC formally decides against a production boost, Saudi Arabia on its own may quietly throw more oil on the market to keep prices down. "You've got to draw a distinction between what the Saudis do at meetings and what they do behind closed doors," he said.

Economic worries are one reason the cartel may agree to hold output steady. In October, OPEC supplied 31 million barrels of the world's 86 million barrel daily oil habit.

Economic concerns are especially acute in the United States, where the financial sector continues to get battered by losses in the mortgage market. As further testament to the wobbly economy, markets are now certain the Federal Reserve will cut interest rates again next week.

Drollas said the so-called "ghost of Jakarta" is still fresh in ministers' minds. In 1997 OPEC increased output just before an Asian economic crisis sapped demand for crude. A year later oil had fallen to $10 a barrel.

"They might use that as an excuse not to push this [production hike]," said Drollas, who added that no production increase could push oil prices back into the $90s.

Even with a weakening economy, $3 per-gallon gasoline is already keeping a lid on fuel demand, which has been flat for several months. And Drollas said refiners will attempt to draw down stockpiles over the next few weeks to avoid paying taxes on inventories on hand at the end of the year.

Another force pushing against a production cut will be the 11 other OPEC nations themselves. Countries like Venezuela, Iran, Algeria, Qatar and Libya are already pumping oil at or near full capacity. For them, a production increase would mean less revenue because they wouldn't be able to offset the falling crude prices with more production.

Nonetheless, many analysts are expecting more oil, whether OPEC sanctions it or not.

"I don't think the Saudis have been happy with the high prices," said Lou Pugliaresi, president of the Energy Policy Research Foundation, who thinks OPEC will boost production by 500,000 barrels or so.

Pugliaresi didn't elaborate on the impact on prices or what price level the Saudis might like to see, simply saying it will have a "moderating effect."

Even the U.S. government thinks OPEC will increase production, and notes that Saudi Arabia has been slowly increasing output over the last several months, even though OPEC's last official production increase wasn't slatted to take effect until November.

After producing 8.6 million barrels a day for most of 2006, the Saudis pumped 8.7 million barrels a day in September and 8.8 in October, according to the Energy Information Administration. It's not clear if the Saudis were actually violating their production quotas.

EIA, a U.S. government agency, doesn't do forward-looking projections for each country. But it estimates that OPEC will go from pumping 30.7 million barrels a day in November to 31.5 million barrels a day by January.

As Saudi Arabia is the only OPEC country with the ability to produce more oil, there's little doubt where that extra 800,000 barrels of crude will come from.

"Meeting or no meeting, the world needs oil," said one industry analyst. "And the Saudis don't want to see $100 a barrel."