OPEC treading a fine line

Analysis |

With oil's price cut in half since mid-July on fears of weaker demand, OPEC risks becoming too aggressive with production cuts, analysts say.

Steep cuts could cause prices to spike, choking off demand. This could ultimately backfire, causing the price to fall even further. It's a delicate balance, says Phil Flynn, analyst at Alaron Trading. "They have to be careful of cutting production in a tough (global) economy. They could make (falling oil demand) even worse."

The Organization of Petroleum Exporting Countries moved to Friday a meeting originally planned for December to address falling prices. Many analysts expect OPEC to cut output by a million barrels a day as some members push to keep the price above $80 a barrel. In recent days it has traded as low as $69 a barrel.

The price decline should lift a burden on consumers and many businesses. The national average price for a gallon of regular unleaded gasoline was $2.92 Monday, down from $4.11 on July 17, according to AAA.

Flynn says OPEC is surely having "nightmares" thinking back to the Asian financial crisis of the late 1990s, which forced oil below $10 a barrel from a peak of close to $40 during the first Gulf War, squeezing major oil-producing nations.

Fadel Gheit, oil analyst at Oppenheimer & Co., doesn't think an announced action by OPEC will stem the decline in oil's price. He says supply and demand dynamics don't justify a price above $55 a barrel.

While OPEC is "under tremendous pressure from Iran and Venezuela" to cut production, any move can be equated to "throwing a bone," Gheit says. Saudi Arabia, which wields much influence over production, is more concerned about the financial crisis and maintaining its close ties to the West.

He suggests production wouldn't fall as much as advertised. Iran and Venezuela have more to lose from a lower price as the heavier and more sulfurous oil they produce sells at steep discounts to light, sweet crude.