Opec's price hawks press Saudis on output A year ago, Opec delegates held what Ali Naimi, the veteran Saudi oil minister, described as "one of the worst meetings we have ever had." The signs are that the one scheduled to take place on Thursday could be almost as bad. The June 2011 meeting ended in disarray with no formal agreement on output targets. That came after five member countries blocked a proposal by Saudi Arabia to offset the loss of Libyan oil by increasing production. The contours of a similar clash are now emerging. A group of Gulf Arab states, led by Saudi Arabia, has proposed raising Opec's production ceiling by 500,000 barrels a day. Other member states, particularly Iran, which is already accusing Saudi Arabia of producing too much oil, instead want Opec to adhere more rigorously to the existing target of 30m b/d. "It could be quite a controversial meeting," says Carsten Fritsch, oil analyst at Commerzbank. There's a risk it could end without agreement, just like the one a year ago. The concerns of price hawks such as Iran and Venezuela are not hard to understand. Thursday's meeting occurs against the backdrop of the biggest monthly fall in oil prices in four years. Under normal circumstances, Opec ministers would have little hesitation in curbing production to push prices back up. But circumstances are not normal. Member states have to balance their natural desire for higher prices against a plethora of geopolitical risks to supply and a demand picture clouded by the Eurozone debt crisis and a weak global economy. Few analysts expect the Gulf Arab states" proposal to be adopted. "They just want to provide comfort to the market and signal that they have the potential to increase production," says Johannes Benigni, managing director of JBC Energy. It's a way of making sure prices don't go through the roof. Opec has been producing at its highest level since 2008, with output averaging 31.6m b/d in May, 1.6m b/d above the ceiling agreed at the last Opec meeting in December. Saudi Arabia has been a large part of that, raising output to more than 10m b/d, a 30-year high. Strong Opec production is one of the reasons why Brent crude has fallen from a high of over $128 a barrel in March to less than $100 now. The fall in oil prices in May was dramatic, the largest month-on-month drop since December 2008. That reflected growing concerns about the eurozone, the weakening economic outlook and a steady rise in global crude stocks. The loss of appetite for oil among commodity investors has been striking. Over two weeks in May, money managers reduced their net long speculative positions for Nymex oil contracts by 34 per cent, the largest amount on record, say Opec economists, as Europe's debt crisis worsened and Chinese economic data came in below expectations. But the fall in the oil price marks a big policy success for Saudi Arabia. Ali Naimi, the kingdom's oil minister, wrote in the Financial Times in March, when oil was surging above $120, that the kingdom would like to see a lower oil price "that will not hurt the global economic recovery." Elsewhere, he has spoken of the need to get prices down to $100. That objective has now been achieved. Saudi is reluctant to rest, though. Opec economists have said the "call" on Opec crude, the amount of oil the cartel would need to provide to balance global supply and demand, will rise to 30.92m b/d in the third quarter, up from 29.25m b/d in the second. Analysts say there is therefore some justification for bringing the group's official production target closer to current output. "Opec has been overproducing for the first half of the year, so there's an argument for narrowing the gap between the ceiling and actual production," says Bill Farren-Price, head of Petroleum Policy Intelligence. However, the pressure on Saudi Arabia from countries such as Iran to dial back on its production will be intense. The kingdom faces a difficult balancing act, according to Harry Tchilinguirian, oil analyst at BNP Paribas. "On the one hand it is part of a cartel that wants to maintain oil prices sufficiently high to meet the fiscal requirements of its members," he says. On the other hand, it wants to be seen by the west as a reliable oil supplier - a kind of central bank of oil which maintains spare capacity to provide liquidity at the margin. Riyadh's pursuit of lower prices is also driven by self-interest, he adds - a big jump in the crude price could force western countries to intensify their search for alternatives to fossil fuels, leading to a collapse in demand for oil. A big unknown is how the west's stand-off with Iran over its nuclear programme will unfold. Talks are due to take place in Moscow on June 18 and it remains unclear whether they will increase the likelihood of a diplomatic solution. JPMorgan predicts Opec will not increase or reduce its production target. Rather, the "Gulf trio" - Saudi Arabia, Kuwait and the UAE - will "choose the least disruptive course of action." That is, they will quietly trim their exports as summer demand increases, to limit the risk of a further fall in prices.