OPEC faces fresh dilemma in setting oil targets

OPEC officials acknowledge they have got their work cut out for them.

"If the decision goes too far, it will affect countries who are already affected by economic crisis," he said. "If it doesn't go too far, then it will affect the producers who might end up in the category of people affected by financial crisis," OPEC's President Chakib Khelil of Algeria said on his arrival in Vienna.

No matter what production levels the cartel decides on, it also faces many of the traditional obstacles to implementing any cutbacks — especially at a time when producers are coping with a sharp drop in oil revenues. OPEC has a weak track record on adhering to announced production quotas; throughout its history, cheating on those quotas has been widespread.

“Anything that OPEC says has to be followed up by actually doing something about it,” said Mark Waggoner, president of Excel Futures. “One of the things that we know that OPEC has done is to say they are going to cut back, but then they’re reluctant to do so and continue pumping at their current rates.”

Despite efforts to present a sense of unity, OPEC members are sharply divided over where they think prices should be. Part of the reason is that oil producers don’t all enjoy the same profit margins.

“For Saudi Arabia the cost of bringing a barrel of oil out of the ground is the least expensive," said Linda Rafield, a senior oil analyst at Platts. “So they can withstand lower prices and not really have it affect their budget. Not all producers can produce at their costs."

Iran and Venezuela, on the other hand, have traditionally pushed for higher prices. Because their oil is heavier and more sulfurous, it sells for less than benchmark crude. Ahead of Friday’s meeting they were pushing for fairly higher price targets; Iran is reported looking for a price target of $100 a barrel, while Venezuela would like to see prices around $80 or $90.

That’s why the Saudis will likely play their traditional role of “swing” producer — bearing the brunt of any production cuts. Analysts say that, no matter what OPEC says in its official pronouncements, the market will be closely watching what OPEC’s biggest producer has to say at Friday’s meeting.

“We still have not heard yet from Saudi Arabia about what their intentions are,” said John Kilduff, and energy analyst at MF Global. “This cut will fall, in my opinion, on them by a large amount. So if they come out and say they are going to cut and agree to this, they will cut and follow through.”

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