SCENARIOS-OPEC's options when it meets on Sept. 9

LONDON/DUBAI, Sept 4 - The Organization of the Petroleum Exporting Countries (OPEC) meets on Sept. 9 in Vienna to review its oil supply policy.

In meetings to date this year, the group has left output targets unchanged. Last year, it pledged to curb output by 4.2 million barrels per day (bpd) or around 5 percent of global supply, to match the sharpest fall in demand since 1981.

The following outlines the possible outcomes and consequences of the meeting:

KEEP SUPPLY TARGETS UNCHANGED

The most likely decision is to keep the group's output targets steady but call for improved compliance by members with the curbs agreed last year. Output discipline has declined from a record level of 80 percent early this year to less than 70 percent of promised curbs.

In the short term, a no change decision would probably have little impact on oil markets as it is already priced in. In the longer term, it could be bearish.

Fundamentals of supply and demand are still weak and most analysts agree the oil market rally to a high for this year of above $75 a barrel at the end of August was a result of cross-asset ebullience, which could fizzle out.

Prices have since dropped back below $70. They are still more than double last December's low of $32.40, the weakest for nearly five years.

Oil has followed equity markets higher since stock markets began to recover from multi-year lows in March. The logic is equity markets are predicting a recovery which will spur fuel demand.

Assuming economies continue to heal, the major forecasters are expecting a rise in energy demand next year following a steep contraction this year, but they are not expecting either fuel demand growth or economic growth to be rapid.

So far, inventories have declined more slowly than anticipated and the U.S. summer driving season, when demand for gasoline is typically highest, had limited impact.

The International Energy Agency said stocks in developed countries stood at around 61.7 days of forward cover at the end of June, unchanged from the previous month and only just below a peak of 62.4 days at the end of March.

The latter was the highest since 1993, the IEA said, and is around 10 days more than OPEC considers comfortable.

In addition to high stocks on land, millions of barrels of fuel have been stored at sea. The IEA said the amount of crude stored at sea fell to about 55 million barrels at the end of July from 70 million a month earlier, but volumes of refined products increased to 60 million barrels from around 50 million.

While stocks have shrunk slowly, there has been some supply disruption in Nigeria because of militant violence.

The hurricane season, which has the power to cut supplies to top consumer the United States, has proved uneventful so far, but it continues until November.

Swine flu's potential impact on the economy could also sap demand if it flares up again during winter in the northern hemisphere. The SARS outbreak in 2002 and 2003 had a major impact on the use of jet fuel.

In the face of so many uncertainties, OPEC ministers could agree to meet again before their next scheduled meeting in December.

OUTPUT CUT

Less likely than keeping output steady, but possible given the weakness of oil market fundamentals. A cut would be a surprise, but would only push prices higher if traders believed it could be implemented.

A surprise cut could also lead consuming countries to criticise producers for seeking higher prices during an economic downturn and potentially quashing nascent recovery.

Any spike in oil prices could unleash the huge quantities of oil held in floating storage on to the market and this would probably knock prices back down again until the backlog is cleared. Eventually, clearing floating storage would be a step toward a more bullish market.

A further cut could leave OPEC struggling harder to maintain output discipline. Angola, Iran and Venezuela have questioned their implied output targets and Angolan loading programmes for October have shown production has hit its highest this year.

OUTPUT RISE

The least likely of the three scenarios. Most observers already see oil market fundamentals as weak, and the oil price is still below the $75 level top oil exporter Saudi Arabia has said is fair.

An increase in output would almost certainly push prices lower and add more oil to bloated inventories.

Extra production would be more likely to result from further reductions to compliance in response to higher prices than through any formal decision to raise OPEC's output ceiling.

CONSEQUENCES FOR OPEC OF LOWER OIL PRICES

OPEC officials have said they were suprised by the strength of oil prices given the state of the economy and fuel demand. With prices where they are, they see little reason to alter supply levels, but that could quickly change if the price falls.

While Saudi Arabia is considered to be reasonably comfortable with oil prices as low as $50 a barrel, Iran and Venezuela are among those who need much higher prices to balance their budgets.

Some analysts have warned of the risk of political destabilisation if oil prices remain below levels needed by producer countries for a significant amount of time.

Iraq's Oil Minister Hussain al-Shahristani came under pressure after Baghdad was forced to cut its budget this year three times following the fall in oil prices from a peak above $147 last year. The pressure on Shahristani has eased since oil prices rallied during the second and third quarters and Iraq increased its budget.

UNDERINVESTMENT

Apart from oil producers' dependence on oil revenues, OPEC -- as well as international oil companies -- has consistently said prices of around $75 a barrel are required to ensure new production is brought onstream.

Of 165 planned projects between now and 2013, OPEC has said it has delayed 35, although it has not specified which ones.

The biggest international oil companies, such as Exxon Mobil , have said they have continued to invest through the downturn.

Others have abandoned more costly oil production projects and the International Energy Agency has said oil prices could surge after demand recovers.

Another possibility is that demand has been permanently destroyed in developed countries and momentum has grown for finding alternatives to oil.