For OPEC session, oil glut adds import

Bid to slow output meeting’s hot issue

The world's major oil producers will gather in Vienna today in what some are calling their most important meeting in six years.

OPEC faces a global oil glut and plummeting crude prices brought on by growing production from non-OPEC nations including the United States. Disagreements emerged this week as some members of the Organization of Petroleum Exporting Countries rejected calls to slow oil production.

For consumers, an expected impasse could be an early Christmas present, analysts say. If the cartel fails to agree on production cuts, oil prices will fall further, taking gasoline prices down with them.

"How much will OPEC supply the market is in keen focus given very strong growth of non-OPEC supply, mainly in the U.S. from shale formations," said Harry Tchilinguirian, head of commodity markets strategy for BNP Paribas in London.

OPEC is facing crude prices that have fallen to levels not seen since 2010.

"This is probably the most important meeting since 2008," when OPEC members agreed to production cuts in response to the world economic crisis in 2008 and 2009, said Eugen Weinberg, head of commodities research for Commerzbank AG in Frankfurt. "And in contrast to 2008, there is no agreement in sight."

Production from the shale oil boom in the United States and Canada is adding to global supply while economies in Europe and Asia are slowing.

The oversupplied global oil markets have sent crude prices tumbling 30 percent since June. For U.S. consumers, this has resulted in some of the lowest retail gasoline prices for the Thanksgiving holiday in years.

The average price of a gallon of gasoline in Arkansas has fallen 23 cents in the past month to $2.64. Nationwide, the average price Wednesday was $2.81, according to auto club AAA's Daily Fuel Gauge Report.

Gasoline prices could decline an additional 5 to 10 cents a gallon, said Tom Kloza, chief oil analyst for Gasbuddy.com, a price-tracking website.

He said that would happen if there is no deal by OPEC today because crude prices would bottom out somewhere around $65 a barrel.

Crude supplies in the United States grew 1.9 million barrels to 383 million barrels during the week ending Nov. 21, the U.S. Energy Information Administration said in a report released Wednesday.

West Texas Intermediate crude prices fell further on the New York Mercantile Exchange on Wednesday after the news that supplies had grown. Brent crude prices dropped in London after Saudi Arabia's oil minister hinted that the country may forgo a production cut.

Benchmark U.S. crude dropped 40 cents to close Wednesday at $73.69 a barrel on the New York Mercantile Exchange, and Brent crude fell 58 cents to $77.75 on the Intercontinental Exchange Futures exchange.

Energy analysts are divided on the possibility of production cuts by OPEC.

"We thought we had a deal in the bag, but now it doesn't look like it's in the bag at all," said Phil Flynn, an energy analyst with Price Futures Group in Chicago.

Several informal meetings were held earlier this week between cartel members -- Saudi Arabia, Venezuela and Iran -- and non-OPEC countries -- Russia and Mexico -- ahead of today's summit in Austria.

After one of the meetings, Venezuela's OPEC representative Rafael Ramirez said that despite concerns about falling oil prices, members couldn't reach an agreement on cuts. And Igor Sechin, the former Russian oil minister and chief executive officer of the country's largest producer OAO Rosneft, said Russia could withstand lower prices.

"Ahead of the official OPEC meeting [today], oil diplomacy is on the rise, and there are a number of bilateral or multilateral talks," Tchilinguirian said. "So the fact that no agreement emerged from them is in no way indicative of which way OPEC will collectively decide to go."

Russia, hurting from weaker oil prices, is pushing for the cartel to cut production, analysts said.

"The current low price levels in oil in conjunction with U.S. and EU sanctions are hurting [Russia's] economy," Tchilinguirian said. "That it consults with the OPEC members to sound out which way they might be leaning in the run-up to the official OPEC meeting is not surprising."

At the crux of the disagreement between cartel members is which will reduce production, said Weinberg who referred to today as the "showdown in Vienna."

"The weak ones, Venezuela, Iraq, Iran and Libya, keep demanding the cuts without really being able to offer anything from their side," he said. "The same holds with Russia."

Those countries, which have weaker economies, are also either under pressure by sanctions -- Iran and Russia -- or conflicts in their countries. Libya is torn by rebels, and Iraq is battling the Islamic State.

They are asking Saudi Arabia, OPEC's largest supplier, to cut production, but Saudi Arabia, Qatar and Kuwait can sustain lower prices, Weinberg said.

"They are in charge of the prices now, a nice position," he said, referring to the Saudis.

Some analysts believe that Saudi Arabia is waging a price war by refusing to bear the brunt of any cuts the cartel may make. They also think that the country wants to maintain lower prices in a move to curtail U.S. shale exploration, which has reduced the demand for OPEC oil.

To slow U.S. oil production, prices will have to fall even more, which is what will happen if there are no cuts by OPEC, said Doug King, chief investment officer with RCMA Capital LLP in London.

He said prices could drop below $70 a barrel if OPEC maintains the status quo.

Lower crude prices mean less revenue for oil companies despite higher production, said James Williams, an energy analyst who operates WTRG Economics near Russellville.

"With lower revenue there's going to be less cash then there would have been to invest in drilling," he said.

Some analysts said it could take a year of weak prices to slow U.S. shale production.

"I do think that the shale producers are going to be able to sustain a lot lower prices then we thought," said Flynn in Chicago.

Murphy Oil Corp. of El Dorado would be one of the companies affected, Pavel Molchanov, an analyst with Raymond James and Associates said in an email. Murphy Oil has been expanding its operations in the Eagle Ford Shale in Texas where it has at least 135,000 mineral acres.

"For Murphy, I would expect that 2015 spending will be 5 percent to 10 percent lower than 2014," Molchanov said.

A Section on 11/27/2014

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