By Brai Odion-Esene

WASHINGTON (MNI) - As the Organization of the Petroleum Exporting Countries ministers arrive in Vienna ahead of Wednesday's ordinary meeting, energy analysts highlight continued concerns by the cartel over large crude stocks held by industrialized nations but disagree on the chance of further cuts to production.

Kevin Saville, a managing editor with Platts -- the energy and metals information arm of McGraw-Hill -- told Market News International that one area the cartel will pay special attention to is the second quarter of 2010. He said while the fourth quarter of 2009 and the first quarter of next year are usually periods of high demand due to winter in the Western hemisphere, OPEC is more worried about the second quarter when traditionally "demand tends to fall of."

OPEC's focus is on the amount of crude stocks held by industrialized nations (days of forward cover), Saville said, citing data from the International Energy Agency, which puts the days of forward cover at almost 62 days. "That's about almost 10 days more than OPEC tends to prefer. OPEC tends to prefer about 52 to 53 days," he said.

OPEC will monitor the global inventory situation for distillate fuel, David Kirsch, manager of PFC Energy's market intelligence division

tied to economic activity and space heating demands, he warned, so if winter is warmer than expected or consumers have already filled their tanks in anticipation of winter, the cartel could face a situation where the current overhang in these large inventories will not be drawn down.

OPEC's concern is that when the expected drop in demand in the second quarter of 2010 occurs and crude stocks remain at a high level, "what will happen with prices then?" Saville said.

"So really they've got to be looking forward at this meeting, saying 'down the road when can we cut?'," he said, "in order to avoid a price crash in the second quarter.". Right now, OPEC does not want to make a move to cut production and cause the prices to jump off and create complications for the broader economic recovery.

So although prices have improved, PFC Kirsch told MNI, prospects for the winter and heating demand "do not look very good at all." He noted increasing risks to demand protection and that the global economy might not be as strong as some are suggesting.

This could result in more significant pressure on prices over the course of the winter, Kirsch added. One of the questions for OPEC is whether they should take some action now to try and tweak these markets and guard against those downside risks, or whether they are content to hope for the best and clean up any surplus in the spring.

"Everybody is happy with prices where they are now, the question though is are the fundamentals such that these prices are durable," Kirsch said, with OPEC delegations becoming increasingly concerned about risks to demand and how quickly that can translate to downside risks to prices.

He noted that historically, OPEC has been proactive on the downside in this kind of situations, but the question remains of "how exactly do you respond, who cuts what and whether or not this is the appropriate time or perhaps should they delay it slightly."

The OPEC nations do have the ability to cut, Kirsch argued, but the question is about the willingness. "That's probably going to be the main focus point of the discussions tomorrow."

They will stay on the sidelines for now, Saville projected, while pondering methods to counteract the anticipated drop in demand next year.

In a research note, analysts at Barclays Capital said they expect no change in OPEC policy unless the ministers take "a far more pessimistic view of the world economy than the incoming data currently suggests."

Saville echoed this assessment, saying OPEC will instead focus on enforcing stricter compliance with already agreed to quotas from previous meetings.

Kirsch disagreed, saying, "I think there is a good chance that they'll take additional oil off the market at tomorrow's meeting." He added, "I don't think we can say that the only possible outcome is a rollover of quotas."

The main factor that will influence the OPEC decision is price level, Saville said, noting that WTI Nymex crude hit a high of $71.56 in Tuesday morning trading. "That level of prices -- considering that we are really at the very early stages of an economic recovery -- OPEC is more than happy with that price right now."

At midday Tuesday, WTI Nymex crude was trading at $71.33, and had seen a range of $67.54 to $71.79 on the day.

On his arrival in Vienna Tuesday morning ahead of Wednesday's meeting, Saudi Arabia's oil minister Ali Naimi told reporters that the current price of crude "is good for everybody: consumers and producers." In an interview with the Kuwait News Agency the same day, Kuwaiti oil minister Ahmed Al Abdullah Al Sabah said he was "comfortable" with current prices, also describing them as "acceptable" for producers and consumers.

This sent the signal that OPEC is pretty pleased with prices right now, Saville said, and that they have no intent -- "barring any shocking surprise tomorrow" -- of changing their production limits right now.

Any OPEC decision to cut oil production will not be because they believe that oil price is too low, but because "they think supplies of total oil," Kirsch said, "are too high or have the potential to grow too high."

So while OPEC will make no move to cut production, Saville said, there will be a message sent to members regarding stricter compliance with production quotas. He noted that compliance has dropped from 80% in late winter to "a little more cheating on the quotas" as the oil price rose in springtime.

Kirsch echoed that sentiment, saying the issue of better compliance will be "a major discussion at the meeting."

However, if prices remain in the $70 range, some OPEC members will continue to produce above their quota, Saville predicted, "although some members might rein it in a bit once the message gets across at this meeting." Still, "if members think they can cheat a little and still sustain a $70 price, I think they'd be happy with that."

On what role major consumers have on any OPEC decision, Saville replied, "We really have not seen any kind of influence along those lines in quite a long while. Really OPEC is looking out for its self interests."

Kirsch agreed, saying ultimately OPEC is going to decide what is best for its members. Still, "they realize that if they take actions that are detrimental to economic activity, that (are) counter-productive

know problems in the global economy are linked to the financial sector and not high energy prices.

And roles played by large oil producers like Russia who are not part of OPEC? Russia is in an "enviable" position, Saville said, if OPEC cuts production and the price goes up they benefit, but at the same time it does not have to adhere to any of the agreements.

Kirsch noted that non-OPEC members have not been invited to observe Wednesday's meeting. "Frankly there hasn't been any cooperation what-so-ever from non-OPEC producers and so that's completely a non-factor in OPEC's decision-making."

** Market News International Washington Bureau: 202-371-2121 **