OPEC: weak economy, Libya restart risks to prices

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Sept. 12, 2011, 7:16 a.m. EDT

By James Herron
LONDON (MarketWatch) -- The Organization of Petroleum Exporting Countries said Monday that the slowing economy and the resumption of Libyan crude exports are a negative risk for oil and warned that it will carefully monitor markets to ensure that its production level remains suitable.

The warning demonstrates how momentum in the oil market has shifted this summer. OPEC's oil production in August reached its highest level since November 2008 as some of its members responded to expectations of strong demand. However, OPEC's new output high was quickly followed by the sharpest drop in the average selling price of its crude for 15 months as fears about the future of the economy weighed on the market.

OPEC, in its monthly report, highlighted two key developments that could have a bearish effect on oil prices.

"The weaker economic recovery is negatively impacting oil demand," with data from key markets, the U.S. and China, already coming in lower than expected, OPEC said. "Required crude supply has been revised down in the third and fourth quarters, at a time when OPEC crude oil production continues to increase," it said.

Libyan oil exports, the interruption of which was a big driver of rising oil prices earlier this year, may also be restored faster than expected now the regime of Col. Moammar Gadhafi has fallen, OPEC said.

Libyan oil production should resume within days and could reach 1 million barrels a day, around two-thirds of pre-war levels, within six months, it said. "The restoration of Libyan oil production to full capacity in less than a year-and-a-half appears to be realistic," and could occur even faster due to the high level of expertise that remains in the country's industry, it said.

The world looks like it will need 0.1 million barrels a day less crude from OPEC this year and next than previously expected, it said.

OPEC is not scheduled to meet again until Dec. 14 to discuss its official production levels. However, several Gulf member countries, led by Saudi Arabia have unilaterally changed their production several times over the summer to accommodate shifts in supply and demand.

The report did not comment on the actions of these members, but noted that the, "current OPEC production profile provides sufficient flexibility to take into account the existing uncertainties and downside risks."