By Barbara Lewis
GENEVA (Reuters) - OPEC could next week agree its first formal increase in supply targets since 2007 when it meets to hammer out its response to Arab world turmoil, extreme market volatility and pressure from the West for action.
One OPEC delegate told Reuters on Thursday the producer group might raise its collective target by as much as 1.5 million barrels per day (bpd) at talks in Vienna on June 8, its first official meeting this year.
In the context of higher than usual tension between some OPEC members, the easiest outcome would still be to maintain existing supply policy and for leading producer Saudi Arabia to carry on making unilateral changes to its output.
But some analysts say the Organization of the Petroleum Exporting Countries risks being irrelevant unless it moves on from a record cut agreed in December 2008 when oil fell below $40, the world was in deep financial crisis and demand had collapsed.
"Production is so out of kilter now with the original agreement (that) if they want to achieve any credibility, they need to do something," said Bill Farren-Price of Petroleum Policy Intelligence.
The 11 members of the group bound by OPEC production targets pumped 26.23 million bpd in May, nearly 1.4 million bpd above their 24.84 million bpd target.
Farren-Price said a "minimum option" would be to formalise leakage already taking place and that the "maximum option" would be to raise the collective limit by 2-2.5 million bpd.
OPEC has not agreed an official increase in production since November 2007.
Unrest in the Middle East and North Africa and the loss of most of OPEC member Libya's exports drove prices to an April peak above $127 for Brent.
The market has since swung violently as evidence built that prices have eroded demand and could be high enough to stunt economic growth.
In May, the International Energy Agency, representative of consumer nations, urged OPEC to pump more and added it could release its emergency stocks should OPEC fail to act.
In a monthly report, the agency trimmed its demand growth forecast for 2011 to 1.3 million bpd, compared with a rise last year estimated at 2.8 million bpd.
Lower demand growth partly offsets the loss of Libyan crude, and stocks for now are comfortable, equating to 58.8 days of forward cover for developed countries in March, the IEA said.
But last year, stocks fell in the peak demand second half and that could happen again, said Lawrence Eagles of J P Morgan, who did not rule out a "creative adjustment" of output targets.
OPEC is unlikely, however, to try to re-assign output quotas across a group whose rivalries have intensified.
"Regional political issues are much further up the agenda for many countries than an OPEC meeting, but look at the solutions to those issues and they all boil back to the oil price," Eagles said.
Iran, OPEC's second-biggest producer after Saudi Arabia and holder of the group's rotating presidency, has led the pursuit of high prices.
Saudi Arabia's long-held policy has been to adjust supply to meet demand, which moderates prices and protects consumption, although analysts say the kingdom has become more comfortable with higher prices given its own budgetary needs.
As the OPEC member sitting on the bulk of the world's spare capacity, Saudi Arabia has already adjusted supply unilaterally.
Initially, it added oil in response to lost Libyan output. It lowered output as demand fell and has since raised it again.
While it can act unilaterally with ease, the kingdom is likely to have difficulty in working with others in the cartel.
Suspicions that Iran stoked Shi'ite unrest in Bahrain, Sunni-led Saudi's neighbor, cranked up tension between Riyadh and Tehran.
The risk that rivalries might spill over into the Vienna OPEC meeting mounted after Iran's President Mahmoud Ahmadinejad sacked his oil minister and seized control of his ministry.
He has since said another minister will take his place around the OPEC table.
It is unclear who will represent Libya after its top oil official Shokri Ghanem defected, possibly paving the way for the Libyan rebels' finance and oil minister to attend.
(Additional reporting by Simon Webb in Singapore, editing by Jane Baird)