OPEC Shocks with 4.2 Million bpd Oil Output Cut

OPEC Shocks with 4.2 Million bpd Oil Output Cut

OPEC, MIDDLE EAST, SAUDI ARABIA, IRAN, OIL, ENERGY, COMMODITIES
Reuters
17 Dec 2008 10:59 AM ET

The Organization of the Petroleum Exporting Countries agreed on Wednesday to make its deepest output cut ever to counter slumping demand and falling oil prices, said the group's Secretary-General Abdullah al-Badri.

OPEC has agreed to cut 4.2 million barrels per day from September actual production of 29.045 million bpd, according to OPEC's post meeting communique. That would imply a new OPEC output target of 24.845 million bpd.

The 12 members of the Organization of the Petroleum Exporting Countries were also aiming to build a floor under prices that have dropped more than $100 from a July peak above $147 a barrel.

As the ministers convened a meeting which was expected to proceed smoothly, oil was trading just above $44 a barrel.

Saudi Arabia, the world's biggest oil exporter, has led by example—reducing supplies to customers even before a cut has been agreed to help push prices back towards the $75 level Saudi King Abdullah has identified as "fair".

Ali al-Naimi, the kingdom's oil minister, was first to publicly call for curbs of 2 million bpd ahead of the meeting.

"The purpose of the cut is to bring the market into balance and avoid the gyrations of the price," he said. "The cut may lead to higher prices or may not."

Others in the group that pumps more than a third of the world's oil said at least two million barrels needed to go from daily output to prevent a massive build in inventories.

"A minimum of two million we think needs to be cut so we can balance the market," Iraqi Oil Minister Hussain al-Shahristani told Reuters.

The expected cut, the third this year, would bring a total reduction in OPEC supply to four million bpd, nearly a five percent cut in world oil supplies.

OPEC has encouraged other producers to cut back too.

Russia and Azerbaijan are attending the Oran meeting as observers and have said they could rein in exports in future, but stopped short of am immediate pledge.

Leading a high level delegation, Russia's Deputy Prime Minister Igor Sechin said in a speech to OPEC that Moscow did not plan to join in coordinated output cuts and did not want to join the group.

Oil below $50 is uncomfortable for all producing nations, but especially for OPEC members Venezuela and Iran which are dependent on higher prices to fund ambitious domestic programs.

Noble Cause

It is hoped that a sharp supply cut will put oil on the path towards $75.

"You must understand the purpose of the $75 price is for a much more noble cause," the Saudi Oil Minister said. "You need every producer to produce and marginal producers cannot produce at $40 a barrel."

(See what analysts are saying about OPEC's supply cuts in the accompanying video...)

"Therefore we believe that $75 is probably more conducive to marginal producers to continue so we don't have a shortage in the market and we avoid the future sky-rocketing of prices," he said.

Analysts said a limited recovery in prices would put a bit more strain on a recessionary global economy, but it may help pull the world back from the brink of deflation—a growing source of concern.

The influential Saudi Oil Minister clearly outlined the kingdom's route to lower production. It is pumping 8.2 million bpd against 9.7 million bpd in August.

"The difference is 1.5 million barrels per day—that is what we've done," Naimi said.

Saudi Arabia's implied output target is about 8.477 million bpd under existing OPEC curbs.

To have a lasting price impact, any OPEC deal must to be strictly observed.

According to independent observers cited in OPEC's monthly report on Tuesday, the group's compliance in November to existing cuts was only just over 50 percent.

Analysts said deeper cuts would further test discipline in the group.

That restraint would be needed to slim down growing world oil stockpiles.

A slump in consumption has lifted oil inventories in OECD industrialized nations to the equivalent of nearly 57 days of forward demand, a measure OPEC closely monitors. The industry norm for this time of year is about 52.
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