Restraint is advised as OPEC meets

The European Commission has warned OPEC not to cut production too drastically in trying to improve oil prices when it meets in Vienna tomorrow. Oil prices have been rising for more than a week on expectations that the cartel will cut production to shore up prices in the face of falling winter demand.

London benchmark Brent blend rallied $0.40 to $26.15 (€27.75) yesterday while New York was closed for the Martin Luther King holiday. OPEC is expected to agree around a 5 per cent cut in production.

"All our figures indicate that there has been over-supply of crude over the past few months and stocks at the level of the consumer have risen sharply," OPEC's secretary-general, Mr Ali Rodriguez, said in Vienna yesterday. "The cut in production is aimed at stabilising prices within the $22-$28 price band for OPEC's basket," he added. Falling oil prices are good news for the US and other economies. Rising oil prices not only push up inflation but conversely add to deflationary pressures as money is spent on oil that would otherwise be spent elsewhere in the economy. European officials have hinted that prices exceeding $30 a barrel cause serious problems for the economy.

Commission spokesman Mr Gilles Gantelet warned that a cut in production could add to oil price instability and would not be in the long-term interests of producers or consumers.

"If OPEC wanted to act once the price is $22 and looks like it will go below that, it could be understandable. The fear, however, is if this action were too hasty . . . could lead to a sudden price increase, this would add to a yo-yo effect and the volatility we have criticised," Mr Gantelet said.

Mr Richardson has been touring the Gulf Arab states to persuade cartel members not to cut supplies when the group meets. He said some states within the cartel were considering a Washington request for a "modest" reduction to stop world oil prices rising to unacceptable levels.

"We do not believe that cuts in production are needed," he told a news conference in Kuwait after talks in Saudi Arabia, Qatar, the UAE and Kuwait. But we are realistic and recognise that there might be some modest cuts. We have asked for as small a cut as possible, this is being considered by OPEC ministers." Kuwait's Oil Minister Sheikh Nasser al-Sabah, often seen as a price hawk, said a cut of 1.5 million barrels a day, a figure supported by OPEC chief producer Saudi Arabia, was "acceptable". Iran, Venezuela and Indonesia also want a cut of at least that amount.

EU Energy Commissioner Ms Loyola de Palacio has had telephone contact with Mr Rodriguez. According to the spokesman, the EU wants to see a formal producer/consumer dialogue to promote price stability.

"The Commission considers the producer/consumer dialogue very important and just as it is of vital importance to the European Union when prices are above $30, we understand that it is of vital interest to producer countries when it's below $22.

"It is not just a one-way dialogue - just for when the consumer countries need it - it's a two-sided dialogue," Mr Gantelet said.