OPEC On Edge

In a world where the traditional notions of supply and demand are being stretched thin, the Organization for Petroleum Exporting Countries is struggling to find a balance between getting the market to take it seriously and keeping prices at a level that waning economies can afford.

Before the cartel met for its second and final day in Algeria on Wednesday, the oil minister from the group's biggest member, Saudi Arabia, said that there was already consensus for a cut of 2.0 million barrels of oil per day. Midway through the day, OPEC president Chakib Khelil then said that a production cut of 2.5 million remained a possibility, according to TradeTheNews.

The market seemed to prefer to wait for the group's official announcement on a cut late on Wednesday. Crude futures on the Nymex were down 4 cents at $43.56 on Wednesday morning, after rising by $1.50 to more than $45.00 a barrel in European trading. United States Oil Fund (nyse: USO - news - people ), an exchange-traded fund that seeks to mirror the returns of crude and other products, was flat at $36.55.

If OPEC were to formally announce that it was cutting by 2.0 million, it would be the biggest single output cut ever made by the organization. Still, such a size would not be particularly alarming. Earlier this month OPEC President Chakib Khelil said there would be a "surprise" cut in production on Dec. 17 and the market has since then upped its forecast for a cut to 2.0 million, from 1.5 million. (See "OPEC's 'Surprise' May Disappoint.") A truly "surprise" cut would have to be one of around 2.5 million to 3.0 million.

Along with tackling an oversupply of oil in the market, OPEC's big challenge will be for all 15 of its members to comply with such a significant cut. For those whose budgets are already stretched--think Iran, Venezuela and Nigeria--that will be especially difficult. The group said that its rate of compliance with that last production cut of 1.5 million in late October had been 85.0%.

"The issue going forward is: 'What is the aim of the supply cut?'" said BNP Paribas analyst Harry Tchilinguirian. "Is it to push for higher prices, or is it to establish a price floor?" Pushing too aggressively for higher prices could backfire in a market that is falling because of waning demand, but the cartel also needs to make a cut significant enough to get the market's attention, he said.

Tchilinguirian believes a cut of 2.0 million would be on the "high side" if OPEC wanted to find that balance, while a reduction of 1.5-1.6 million would be more appropriate.