Barbara Lewis - Analysis
LONDON (Reuters) - OPEC members might have ignored output limits in the past, but they mean business now after oil prices shed more than half their value in three months and financial turmoil has crushed demand.
Most of the 11 members of the Organization of the Petroleum Exporting Countries with set targets have said they were reducing output in line with a deal last month to take away 5 percent.
After the agreement at an emergency meeting oil prices sank below $62 a barrel, but have since recovered slightly.
"I think OPEC realizes it has to show a very determined, united front in the first cut. If it does not, no-one is going to have any faith in future cuts," said Lawrence Eagles of JP Morgan.
Top exporter Saudi Arabia, which holds the key as the producer pumping most above its target, has yet to tell customers its intentions, but industry sources said it was about to do so.
"Everything depends on ... the decision of Saudi Arabia," OPEC President Chakib Khelil said at the weekend as he urged the kingdom to make a swift announcement.
After Saudi Arabia, Iran is the next biggest OPEC exporter and it has told customers they will receive less oil.
Even Nigeria, which has been forced by militant attacks to shut in production and is pumping below agreed limits, has said it will lower output in November and December by 5 percent.
Many cargoes are sold weeks ahead, meaning November cuts are logistically complicated.
But although the details have yet to become clear, analysts argued OPEC's chances of compliance were good, especially compared with the deep price slump of 1998.
Oil then fell below $10 as the group pumped above targets when the Asian financial crisis dented demand.
The big difference between now and then is that most producers are pumping at close to capacity, leaving few countries responsible for lowering output.
"The onus falls primarily on Saudi ... I can't see them sitting on the fence... Saudi has always been more market savvy," said Harry Tchilinguirian of BNP Paribas.
SLIDE FOCUSES MINDS
Already in September, OPEC had promised to remove around 500,000 barrels per day (bpd) of surplus production above its limits. In the event, September shipments fell by around 300,000 bpd and dropped again in October, a Reuters survey found.
In September, oil was still around $100 a barrel. It has since fallen to less than half the July record of $147.27.
The slide prompted an emergency meeting in October when OPEC lowered its collective ceiling from 28.8 million bpd to 27.3 million bpd -- level with agreed output in February 1998.
Subsequent cuts took target output down to a low of 21.70 million bpd in January 2002.
Kevin Norrish of Barclays Capital said that in 2001-2002 OPEC largely respected targets, curbing output by 4.3 million bpd little short of pledged cuts of 4.9 million. It was a degree of compliance sufficient to pave the way for the rally to the July peak.
Norrish anticipated OPEC would again cut more deeply than needed to balance supply with demand, meaning oil could be back above $100 by the second quarter of next year.
"There is a lot of scepticism around about OPEC, but it's not justified by the group's track record. Recently, they have tended to cut too much, partly because ... non-OPEC supply has always tended to undershoot consensus expectations," he said.
In the near term, market sentiment could still stay negative whatever OPEC does as lost confidence and limited credit to buy oil drives demand and prices down further.
In initial reactions to the OPEC cuts, some customers said they did not need the oil that has been taken away.
JP Morgan has predicted fuel use will not just cease to grow, but will contract next year.
"The real issue is how much more they need to cut. We think they need an additional million barrels per day (bpd) at the next meeting to prepare for Q1 and beyond," said Eagles.
For Venezuela the solution is to reinstate the price band mechanism OPEC quietly abandoned in 2005. In theory it allowed oil to be subtracted or added automatically, depending on whether the market were below or above an agreed price, but in practice was disregarded.
Critics say the band would be particularly unhelpful now given the influence of low inventories and general nervousness in stoking volatility.
There is also the problem that even if OPEC is unanimous about the need to curb supply, it is still a disparate group.
"Defending a price band would imply you had a common price objective," said Tchilinguirian.
Eagles agreed OPEC was unlikely to readopt the band, but he said it had its uses when OPEC needed to monitor the market intently, possibly at ever more frequent meetings.
"Whether you call it a price band mechanism or frequent meetings, the result is going to be the same," he said.
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