OPEC set for major output cut later this week

[December 16, 2008]  ORAN, Algeria (AP) -- OPEC oil ministers arriving Tuesday amid tight security to this rain-soaked port city raised expectations that the group will slice output significantly when it meets the following day.

The presence of a high-level delegation from nonmember Russia, the world's second-largest oil producer, only added to investors' hopes that coordinated action could stop crude's rapid slide from the record it hit in July above $147 a barrel.

"What is important is that there should be a consensus to cut production. A significant cut," Venezuela's energy minister said after arriving in Algeria's second-largest city.

Rafael Ramirez, whose country ranks among the Organization of Petroleum Exporting Countries' price hawks, added that Venezuela favors a cut of between 1 million to 2 million barrels per day at the meeting.

While the near 70 percent drop in oil prices from their summer highs is good news for drivers already straining from the financial crisis, members of the 13-nation Organization of Petroleum Exporting Countries are hurting from levels that are now in some cases below their profit margins.

They and other oil producers also fear a drawn-out lull in prices could hurt investment and lay the groundwork for another sharp price spike down the road.

"There's always been some finger-pointing at OPEC, but now even some (rich consuming nations) are saying maybe prices have gone too far," Olivier Jakob of energy analysis firm Petromatrix in Switzerland said ahead of the meeting. "In terms of security of supply, you are much worse at $40 a barrel than at $75."

A decision on production is not expected to come until OPEC meets Wednesday, but the group has signaled in recent days that a large cut is necessary to shock the market and put a floor under prices.

The strategy has halted the slide in the very short term. Prices rose above $45 a barrel in electronic trading Tuesday on the New York Mercantile Exchange -- above the four-year low of $40.50 crude slumped to earlier this month.

On Monday, OPEC President Chakib Khelil hinted at the magnitude OPEC is considering by evoking the group's last Algeria meeting four years ago, where "we reduced by 2 million barrels."

"It was a historic conference, and it enabled us to meet the challenge of falling markets," he told reporters.

Khelil said that a "fair price" for oil should be around $70 to $80 per barrel -- the benchmark for several OPEC members below which they begin losing money.

OPEC, however, must weigh production cuts against the risk of driving the economies of its top customers deeper into recession.

A senior OPEC official, who spoke on condition of anonymity because he was not authorized to comment publicly, said "reasonable" OPEC nations would accept prices around $50 a barrel in the short term so as not to contribute to the world economic downturn.

Ministers arrived to Oran under extraordinary security. Police and the military manned multiple check points in and around the city.

Local newspapers reported that authorities swept through the western Algeria port to temporarily take dozens of petty criminals off the streets. The El Khabar daily said an additional 4,000 police officers were assigned to the city.

The OPEC meeting comes as two al-Qaida militants were killed in a gunbattle with the army in a town near Oran this weekend. Security was further tightened on Tuesday as Algeria's President Abdelaziz Bouteflika arrived to tour the city and meet the OPEC delegates ahead of presidential elections this spring.

[Associated Press; By ADAM SCHRECK]

Associated Press writers George Jahn and Alfred de Montesquiou in Oran contributed to this report.

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