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. Last Updated: 07/27/2016

OPEC Lacks Ready Cure for Oil Prices

VIENNA, Austria -- OPEC producers on Tuesday offered no immediate remedy for a collapse in crude prices that threatens to ruin the cartel's successful two-year strategy of keeping oil in a high price band.

The Organization of the Petroleum Exporting Countries is boxed in by political sensitivities in the wake of suicide attacks in the United States and a weakening world economy that is sapping demand for petroleum.

Ministers arriving for a Wednesday meeting moved to reassure a jittery market that they had not dropped their guard in supporting prices. But traders said Monday's heavy slump had undermined confidence in the cartel's ability to maintain its central $25-per-barrel target.

"We shall try to defend the $25 target. This is very, very important for the market," said United Arab Emirates Oil Minister Obaid bin Saif al-Nasseri.

In Monday's fall, triggered by gloomy economic forecasts, OPEC's reference basket of crudes fell to $20.51 per barrel, below the group's $22 to $28 target range.

OPEC ministers who meet Wednesday are expected to keep oil supplies unchanged. Some delegates said the group could do little for now other than try and talk up the market.

The cartel's president, Chakib Khelil, said he expected values to bounce back without the need for intervention from producers. "Prices are going up by themselves -- they're not staying there," he said.

Brent blend crude on Tuesday rallied 76 cents to $22.78 per barrel after a $3.42 collapse on Monday.

Dealers said worse could be in store for OPEC if it fails to restore market confidence in the strategy that has seen it maintain prices this year with 3.5 million barrels per day of output reductions.

They said the cartel was in danger of shooting itself in the foot and sending prices spiraling lower if it leaked further comments suggesting it was considering abandoning its high price policy.

Kuwaiti Oil Minister Adel al-Subaih had said Monday that his country, recognizing global economic difficulties, was happy with prices at the lower end of OPEC's range.

While other ministers insist the $25 target remains intact, the seeds of doubt have been sown.

"Whatever way you look at that comment it is tantamount to saying that the cartel is happier with a target price lower than $25," said Lawrence Eagles of brokers GNI. "If a target is respected then it provides a psychological prop. Toying with that target can wreak untold harm to the market."

The outlook for OPEC nations, many of which are basing their budgets on $25 oil, looks decidedly awkward.

OPEC's economists, in a report prepared for ministers, have ratcheted down expectations for world oil demand next year. "It doesn't look good," said one representative on the cartel's economic advisory board.

This year's cuts have taken official limits down to 23.2 million bpd but leakage, estimated at up to 1.5 million bpd, means actual supplies are running much higher.

Dealers said the market would not take seriously any suggestions of another round of reductions before compliance with existing limits improved.

"What OPEC needs to do is regain the respect of the market by ensuring that compliance is rock solid," Eagles said.

"If OPEC decides to take no action they could create a de facto production cut by improving their compliance," said Simon Games-Thomas of NM Rothschild bank in Sydney, Australia.

U.S. appeals for economic and political cooperation in the wake of the Sept. 11 assaults make it very difficult for OPEC's most influential member, Saudi Arabia, to support any early action to prop up prices.

The United States' biggest oil supplier, Saudi Arabia has pledged full support to Washington on Saudi-born Osama bin Laden, the chief suspect.

"There is very little they can do at this point," said Yasser Elguindi of Washington's Medley Global Advisors. "There is a widespread belief within the oil market that OPEC politically is in no position to try to defend high prices."