OPEC Poised to Keep Supply Steady at $40 Level

OPEC on Friday prepared to keep oil supply limits on hold, confident that the world economy can absorb higher energy costs.

Meeting on Sunday, the Organization of the Petroleum Exporting Countries (search) appears convinced the world can cope with the inflated fuel bills that came with last year's 34 percent increase on world crude markets.

Influential Saudi Oil Minister Ali al-Naimi said on Thursday that world growth had proved sustainable despite prices now at $48 a barrel for U.S. crude.

"My view is the world is not suffering, as far as economic growth is concerned, from where prices are today," Naimi told Reuters in an interview at the World Economic Forum (search) in Davos. "The price today doesn't seem to be affecting economic growth negatively and we do not want it to."

The International Monetary Fund (search) is projecting world growth at 4.3 percent this year, down from 5 percent in 2004 but still about one percentage point higher than the average of the past 20 years.

China's bid to engineer a soft landing is still expected to see growth of 8.5 percent in 2005, moderating from 9.5 percent last year, according to a Reuters poll of 10 regional economists released on Friday.

Economists say that negative real interest rates -- inflation in major economies being higher than interest rates -- enables an expansionary world economy to afford higher high oil prices.

"Unlike the past, when central banks were fighting oil price increases with higher interest rates, we're now in an environment of negative real interest rates and expansive monetary policy worldwide," said Gary Ross, chief executive of leading energy consultancy PIRA Energy.

"Simply put the world is able to absorb much higher energy costs."

Exactly how high OPEC feels it can raise the bar for defending prices remains unclear. It helped push U.S. oil back toward $50 a barrel this month by cutting back output at the turn of the year.

Ministers have yet to set an official new price target to replace the long-disregarded $22-$28 range that was established in 2000.

But several producers have said strong growth in demand from China and India now supports fair value for a cartel reference basket of crudes at about $35 a barrel, or some $40 for higher-quality benchmark U.S. crude.

Despite a hard-earned reputation for pulling last-minute surprises, OPEC is thought virtually certain at Sunday's meeting to keep production policy unchanged.

That helped push oil prices lower on Friday, U.S. crude easing 74 cents by 1500 GMT to $48.10 a barrel.

Five of the group's biggest producers, including Saudi Arabia, have said this week they see no need to lower output yet to combat lower seasonal demand in the second quarter.

The next meeting in Iran in mid-March, when a new price target may be announced, would appear to give the group sufficient time to trim supplies should that be required.

Early estimates are that OPEC cut about 500,000 barrels per day from supply in January to 29 million bpd after ministers agreed in December to withdraw output in excess of official quotas.

OPEC economists estimate second quarter demand for cartel crude at 27.7 million bpd, implying a meager stockbuild of 1.3 million bpd in the second quarter.