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Sep 9, 2008

Russia's Bid to Strengthen OPEC Ties May Sow Unease

Ed: Connect the dots. Energy independence is issue one for national security.

Oil-Cartel Ministers 
Will Curtail Output 
Amid Falling Prices

VIENNA -- Russia upped the ante in its faceoff with the West by proposing "extensive cooperation" with the OPEC oil cartel, an idea that would stir concerns among big oil-consuming countries like the U.S.


The Russian proposal came just hours before the group's 13 ministers decided to scale back production by around 520,000 barrels a day, or less than 1% of world oil supply, over the next 40 days in the face of falling prices and slowing demand growth.

OPEC officials described the move as necessary to avoid a buildup of excess supply, but the group could face criticism for moving to cut production when prices are still above $100 a barrel. The cuts would put OPEC's output -- now at around 32.7 million barrels a day -- back to where it was during the first three months of the year.

The decision, following hours of debate, came after U.S. benchmark crude fell Tuesday to its lowest level in five months, settling at $103.26 a barrel, down $3.08, or 2.9%, on the New York Mercantile Exchange.

The offer by Russia's energy czar and vice premier, Igor Sechin, came as a surprise twist at the start of the OPEC session. The Organization of Petroleum Exporting Countries supplies around 40% of the world's oil, while Russian output makes up another 11%.

Mr. Sechin made his offer for cooperation in person at the meeting in a visit that OPEC officials said was arranged in recent days. The Russian delegation of more than 20 officials raised eyebrows at the cartel's usually cloistered headquarters along the banks of the Danube; it was among the largest sent to Vienna by a nonmember state, an OPEC official said. It was also the most high-profile visit from Moscow to the cartel in at least a decade. Among the group was Sergei Bogdanchikov, the chief executive of Russian oil giant OAO Rosneft.

The Russian outreach to OPEC comes at a time of severe strain between Moscow and the West after Russia's invasion of Georgia last month. While an actual alliance with OPEC seems far-fetched, concerns already run high in the U.S. and Europe that Moscow is trying to increase its chokehold over Europe's energy needs. Moscow supplies Europe with most of its natural gas and much of its crude oil and gasoline.

OPEC's first formal gathering in six months was otherwise fraught with politics and posturing as factions tussled over whether to cut output even as oil still hovered above $100 a barrel. Some voices within the group argued that OPEC should exhibit restraint and lower its production. The decision to cut output over the next month means that Saudi Arabia will likely scale back its production to where it was earlier this year, before Riyadh began ramping up in a bid to drive down record prices.

Analysts have been closely scrutinizing OPEC's actions for any signs of a consensus on what might be the optimal price that the cartel would seek to defend. The latest action suggests that OPEC sees that price at around $100 a barrel, despite the fact oil is still up nearly 33% from a year ago and nearly quadruple what it was in 2003.

The decision came as a surprise after many OPEC officials said in recent days that the market remains healthy, with neither too little nor too much oil washing around. Arriving at his hotel around dawn Tuesday, Saudi oil minister Ali Naimi, the principal voice within the cartel, described the market as "fairly well balanced" and "in a healthy position."

But that view was contrary to assertions by the Iranian oil minister, Gholam Hossein Nozari, that the market is oversupplied. Libya's top oil official, Shokri Ghanem, also spoke of a supply "glut."

OPEC President Chakib Khelil, who is also Algeria's oil minister, said the group's action was unlikely to ease the recent slide in oil prices because weakening U.S. and European demand had allowed crude inventories to build. "It's pretty obvious why we took this action," Mr. Khelil told reporters afterwards.

For months, OPEC ministers have blamed everyone from market manipulators to doomsayers for driving oil prices to records, arguing that the price had no relation to the fundamentals of supply and demand. But now the cartel must decide when prices have fallen too far...

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