Mild winter weakens oil prices, says London think tank

LONDON, Dec. 22 (UPI) -- A mild winter in the Western Hemisphere will continue to exert downward pressure on crude oil prices that are already weak amid a slow economic recovery worldwide, London think tank Center for Global Energy Studies said Tuesday.

CGES said a poor outlook for economical recovery, despite remedial measures by governments, meant oil prices would continue to slide.

Crude oil prices held under $74 a barrel on the New York Mercantile Exchange Tuesday, amid indications that both Iraq and Iran want to increase their supplies to catch up on revenue diminished by recent price falls and recession-induced low demand.

OPEC oil ministers are meeting in Luanda, Angola, to consider shifting strategies to protect their cash balances from further price falls.

Before anything else, however, they have on their hands the problem of members producing more oil than they should.

Despite so-called production quotas, OPEC countries have been pumping out more oil than they are allowed under group agreements.

Amid fears the price may fall further and amid liquidity problems aggravated by the economic slowdown, the member countries' compliance with OPEC output quotas has been uneven.

CGES said in its Monthly Oil Report that OPEC member countries could be producing up to 800,000 barrels a day more oil than they are allotted under the group's quotas.

The quota system is OPEC's answer to market management, but, according to analysts, it usually exists more in breach than in observance. OPEC has never quite conquered the more volatile and powerful forces at work in the marketplace.

CGES said Russia had caught up on production and therefore was adding more oil to the market. The recovery in oil prices after falls earlier in the year helped Russian companies to limit the output declines in West Siberia, allowing new fields to more than offset the losses, said the Center. Production from the Caspian Sea has also been growing steadily, CGES said.

Added to the rise in Russian production have been recent increases in the United States, Brazil and Colombia. Combined oil production outside OPEC has helped to lift non-OPEC oil supplies in 2008 by around 570,000 barrels compared with 2008.

All the extra oil has served to raise the weight of oversupply on prices, said the center.

Unless consumption grows to draw down the stocks the pressures will continue to build up, CGES said.

"Chinese and Indian refiners are continuing to buy and process more crude oil than they need, with the excess products, especially the middle distillates, ending up being stored in tankers off the coasts of the major oil consuming countries," the center said.

"Unless these floating stocks -- now reaching 100 million barrels of products alone -- are reduced, either by cold weather or through rising economic activity, oil prices are likely to slip back in 2010."

CGES notes that oil market fundamentals have weakened over the past month, as economic recovery in the industrialized countries has faltered. Draws on existing stocks that were expected for the final quarter of 2009 have not materialized, and inventories have continued to rise.

The center's analysts still expect global oil demand in the current quarter to record its first year-on-year increase since the second quarter of 2008, but they predict the rate of growth now appears likely to be lower than anticipated a month ago.