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OPEC Expects Latest Cuts to Help Stabilize Oil Prices

OPEC is preparing to implement another round of oil cuts from Feb. 1, satisfied its decision to
curb supplies by 6% has succeeded in restoring market balance and arresting a $24 price fall since July.

The group that pumps over a third of the world's oil is cutting supplies in two steps--by 1.2 million barrels a day from Nov. 1 and 500,000 barrels from Thursday. Target output for the 10 members bound by the deal--Iraq and new member Angola are exempt--will fall to 25.8 million barrels a day.

Oil stocks in industrialized consumer nations fell some 60 million barrels in November and December alone, despite a mild start to the northern winter. A cold snap finally kicked in the U.S. this month.

According to OPEC's own numbers, member countries delivered 63%, or 758,000 barrels a day, of the agreed cuts in December with the world's biggest exporter Saudi Arabia taking the lead.

"The ministers see reasonably good compliance with the first round of cuts and are expecting at least the same kind of compliance in February," an OPEC source said on Tuesday.

"Measures Working Well"

Saudi Oil Minister Ali Al-Naimi said this month: "The measures are working well. Inventories in the fourth quarter have come down...which puts the market closer to balance."

Shipping analysts Lloyds Marine Intelligence Unit say OPEC has reduced its seaborne exports, as distinct from output, by a far deeper 1.9 million barrels a day since October.

Some oil analysts say the risk to prices is to the upside.

Having hit an all-time high of $78.40 a barrel in July, when fighting flared in Lebanon, oil tumbled below $50 on Jan. 18 because of the mild northern winter and a shift in speculative
investments.

OPEC has held its nerve. Saudi Oil Minister Naimi said there was no need to panic. This week prices have settled into a $50-55 range, well down on July's peak but far above the $20
seen at the start of 2002, and most OPEC members' budget price.

Lehman Brothers analyst Edward Morse said the Saudis seemed intent on defending a $50 floor price for U.S. oil and willing to raise output if and when it rises above $60.

But he added: "We very much doubt Saudi Arabia's ability to micromanage this market. If the need for Saudi oil arises, it will take days if not weeks for the government to decide to open
its taps and Saudi oil is 45-90 days away from major markets."

Demand Seen Rising

"It remains our view that market fundamentals for 2007 will show tightening throughout the year, with demand rising faster than Saudi projections and non-OPEC supply lagging Saudi
projections considerably."

In the approach to OPEC's next meeting on March 15, its members hold the view the supply cuts in train will be enough to ensure the 85 million barrels a day global oil market remains in balance through the second quarter, when demand normally slackens.

But with new OPEC member Angola expected to ship a record 1.6 million barrels a day in March, analysts say OPEC efforts to restrict supplies could be frustrated.

Crude shipments from the second largest producer in sub-Saharan Africa are expected to rise by 100,000 barrels from February because of a ramp up in a new offshore field.

Another wild card is Nigeria, its output cut by a fifth because of attacks by militants in the oil-rich Delta.

Unsure what the future holds, Nigeria is exporting as much as it can. Shipments by Africa's top producer are expected to hit a 14-month high in March, traders said on Monday.

Barclays Capital analyst Kevin Norrish cautioned against reading too much into these forecasts, however.

"Instead OPEC production figures for November and December--which provide some evidence on the extent of OPEC's compliance with the cuts agreed in November--show that output was
substantially reduced by all OPEC's members but Nigeria," he said.

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