OPEC Would Cut Output Further To Stop Price Falls; Saudis Back Action If Prices Drop.

*** Freight Rates Eased As OPEC Cut Crude Oil Supplies, With A Run From The Gulf To NEW At WS70, Down From WS75 In The Previous Week

*** As East Asian Oil Refiners Lowered Their Runs, Tanker Rates Went Down

*** The Market Now For Cargoes To The Gulf Of Mexico Is Weaker As The Rate Fell To WS95 & To Asia To WS80 *** The Story Is The Same For Suezmax

*** Demand Dropped For W. Africa To USA To WS120 - From WS185 In Previous Week

*** Aframax In The Med Fell From WS220 To WS135; In The Black Sea The Pattern Was Similar As Rates Dropped - From Novorossiysk To The Med The Rate Fell To WS132.5

Crude oil prices ranging between $55-60/barrel now are seen to be too low for OPEC whose ministerial meeting in Nigeria next month would decide to cut production by another 300,000 b/d. The winter cold in the northern hemisphere is forecast to be mild. But one price-push factor, a continuing high level of speculation in oil futures trading by huge funds and investment banks, would move swiftly at the slightest geo-political accident in the Middle East or Nigeria.

The first to indicate a production cut from the supply side came on Nov. 5 from OPEC President Edmund Daukoru, who then said "soft" oil market conditions may force the group to lower its output further next month. That was among a string of OPEC comments indicating the group may no longer tolerate prices below $60/b.

"A December quota cut may be necessary because the market is still soft", Daukoru, who is also the minister for petroleum in Nigeria, told Reuters as he arrived in Seoul for a petroleum conference. He added: "$60 will not hurt the world economy".

True, a $60/b WTI does not hurt the economy, which seemed to be doing well even when the US crude hit $78.40/b on July 14 and Brent jumped to $78.62/b in August. But as time goes by with conventional oil above $25/b since late 2002, the share of alternative sources of energy has been rising steadily in the past four years and will continue to climb at the expense of OPEC's long-term interests.

While many other OPEC members say a further reduction may be in order, Daukoru's apparent ease with $60/b WTI follows comments from price hawks Iran and Venezuela indicating that the group may be targeting a higher long-term price defence level than analysts had expected.

OPEC, which produces about one-third of the world's conventional oil, agreed on Oct. 20 to cut production by 1.2m b/d from Nov. 1 - its first formal output curbs since 2004 - to halt a slump in prices from the July/August records to less than $57 recently - their sharpest fall in more than 15 years. Despite the production cuts, however, prices have remained stubbornly below $61/b, in part due to doubts over compliance from many members, including Nigeria.

OPEC's oil ministers meet again in Abuja, Nigeria, on Dec. 14. Many analysts have said OPEC's Oct. 20 decision in Doha signalled its intent to defend oil prices at around $60/b. Although most members have avoided naming any new price target, Iran and Venezuela both have set the floor at $60/b.

Venezuelan Oil Minister Rafael Ramirez said OPEC's strategy was to maintain at least $60/b, and that it would need to cut another 300,000 b/d in December to do so. His Iranian counterpart, Kazem Vaziri-Hamaneh, said that a price below $60 was unacceptable due to the rising cost of production.

Even the oil minister from Norway, normally wary of straying too far from OECD policies despite being the world's third-largest oil producer, said oil prices were "reasonable".

OPEC is surprised that oil's surge since late 2002 has yet to crimp economic growth. Now it hopes to maintain prices at the highest level possible to finance significant capacity expansions without derailing the world economy. Iran is among members suggesting that the production cut on Dec. 14 should be 500,000 b/d.

A stronger sign came on Nov. 7, when Saudi Petroleum and Mineral Resources Minister Ali al-Na'imi told reporters OPEC will cut output further at its Dec. 14 meeting if the oil market remained imbalanced.

Na'imi said: "We will look at the numbers, we will assess the market, if it is out of balance we will take some more action". When asked for his assessment of the current supply/demand picture, Na'imi said: "The market is not in balance. The inventories are very high".

Na'imi was returning to the kingdom from Islamabad, where he told the second World Islamic Economic Forum that low oil prices discouraged producers' investment in new capacity and caused oil market volatility. He added: "The reality is very low oil prices are not sustainable. In fact they invariably lead to volatility and subsequently higher prices... Prices must be high enough to offer an adequate return to producers without hurting consumers... We have seen that there is a strong negative correlation between low oil prices and the ability of producers to continue supplying energy to growing economies. The low oil prices of the 1980s and 1990s offered little incentive to invest in the energy industry. Some individuals also mistakenly believe that economic growth is inversely related to the price of oil or to the amount of oil a country imports. Recent experience has shown this is not true.

"Neither high prices nor substantial energy import dependence has been a major impediment for...economies. Some say that the pre-eminent goal of energy policy should be to keep oil prices as cheap as possible in the mistaken belief that low oil prices are a precondition for stability and sustainable economic growth. Experience taught us that...the opposite is true".

Na'imi said he saw great opportunities for investors to research, develop and commercialise new sources of energy which could help supplement conventional energy resources. He said: "Conventional energy resources - oil, gas and coal - are plentiful and sufficient to meet world energy needs for the foreseeable future". But he added: "The world must find, develop and produce large new quantities of energy on a scale unprecedented in the history of mankind. I believe it can and will be done but it will not be easy".

The week at NYMEX ended on Nov. 10 with December WTI slipping 81 cents to $60.35/b, after jumping $1.33 a day earlier. December Brent on the ICE exchange dropped 89 cents to $60.43. NYMEX heating oil dropped nearly 2 cents to $1.7267/g, with unleaded gasoline falling nearly 3 cents to $1.5730/g, and natural gas were down 20.5 cents to $7.750/000 CF. WTI on Nov. 9 jumped above $61 in reaction the Democrat's victory in the Nov. 7 US mid-term elections and amid reports of an increase in fourth-quarter world energy demand. The IEA on Nov. 10 forecast a 2.6% jump in fourth-quarter global demand, citing high consumption in the US; it said US consumption was accentuated by the comparison to a year ago when the impact of Hurricane Katrina and mild weather curbed demand. The IEA said world demand for OPEC oil was expected to rise 1.6m b/d, due to lower non-OPEC output.

The outlook pointed to tighter market conditions and higher prices just as OPEC output cuts announced on Oct. 20 took effect. WTI tumbled to $57-$61 over the past month. The crude price surge on Nov. 9 came as US mid-term election results showed that Democrats won control of the House of Representatives and the Senate. Prices were supported by OPEC ministers saying another production cut may be in order during their Dec. 14 meeting in Abuja.

Venezuelan President Hugo Chavez on Nov. 8 said he will work to prevent oil prices from falling below $50/b. Venezuela, the fourth largest supplier of oil to the US, has been a consistent OPEC price hawk and at times has called for a $60/b minimum for OPEC's basket of crudes. "Today we are determined to prevent the price from falling below the floor of $50, and we will keep [prices] there", Chavez said during a press conference with foreign correspondents in Caracas. It was referring to Venezuela's crude basket, which in the previous week closed at $49.38. On Nov. 7 Ramirez said $60/b was a fair price for WTI.