OPEC may cut oil output Vienna meeting may see call for supply cut in early 2001 on fears of price drop November 9, 2000: 7:50 a.m. ET

LONDON (CNNfn) - OPEC may cut oil supply early next year amid concerns crude prices may fall through the floor after the cartel increased output fourth time this year, oil analysts said on Thursday.

"OPEC has a paranoia with oversupply," Lawrence Eagles, a commodity analyst at brokerage GNI Ltd., told CNNfn.com. "This weekend's meeting is likely to see OPEC agreeing to meet some time in January or February to discuss a cut in supply."

The Organization of the Petroleum Exporting Countries meets at its headquarters in Vienna on Sunday to discuss what to do next. International political pressure has forced the oil cartel this year to boost oil production by more than 3.7 million barrels a day, in a vain attempt to deflate oil prices that have risen to 10-year highs.

Algeria said Wednesday it would call for an OPEC meeting in January to discuss the market situation and possibly agree to a cut in oil production to avoid a price drop in the second quarter of 2001.

OPEC may consider "suspending" the price mechanism, Eagles said. "It doesn't work."

Oil prices have stubbornly stayed above $30 barrels, despite the cartel's agreement to pump an extra 500,000 barrels on Oct. 30. Under the current price mechanism the cartel should increase output in 20 business days, although analysts don't expect a hike.

Under its price mechanism adopted in March, if the average price of OPEC's benchmark basket of different oil blends remained above $28 for 20 business days an increase would automatically follow. OPEC can also reduce output by 500,000 barrels a day if oil prices stay below $22 a barrel for 20 days.

The International Energy Agency (IEA) expects world demand for oil to fall to 77.5 million barrels a day in the first quarter of next year, from a current 78.4 million barrels. The Paris-based institute also foresees a further drop in demand to 75.6 million barrels a day in the second quarter.

OPEC's regular twice-yearly meetings are in March and September. The cartel held an extraordinary meeting in July because it was worried about the rise in oil prices, after which Saudi Arabia unilaterally raised production by 500,000 barrels, but backtracked to maintain unity with its neighbors.

The cartel, which pumps about 40 percent of the world's oil, is concerned a fall in demand and will see prices plummet. It was badly caught out by the Asian financial crisis in December 1998, when oil hit a low of $9.95 a barrel on Dec. 11, 1998. A year earlier OPEC had raised output to meet demand from booming economies in the region.

OPEC in early 1999 agreed to restrict production, resulting in a tripling in the price of crude over the following year.

Oil consumers' concerns in recent weeks has have centered on declines in U.S. oil inventories to 24-year lows, just as more heating oil was required to meet rising winter demand in the northern hemisphere.

The IEA in its monthly oil market report said there was still "serious concern" about the level of heating oil and diesel inventories, or distillates, among Organization for Economic Cooperation and Development countries.

http://cnnfn.cnn.com/2000/11/09/worldbiz/opec/

-- Martin Thompson (mthom1927@aol.com), November 09, 2000