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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OPEC says it will cut output by 2 million barrels

GEORGE JAHN

Associated Press

December 17, 2008 at 6:00 AM EST

ORAN, ALGERIA — Saudi Arabia, OPEC's de-facto leader, said Wednesday the group will slash a record 2 million barrels from its daily production, while Russia and other countries said they would join in the effort by removing hundreds of thousands more barrels from the market.

Saudi Oil Minister Ali Naimi said there was an OPEC consensus ahead of a formal agreement later in the day for the cut.

An official decision to cut 2 million barrels from output all at once would be a first for the organization. OPEC had cut that amount from its output four years ago, but that was done in two stages.

Also significant would be formal support from Russia, Azerbaijan and other non-OPEC producers. Mexico, Norway and Russia slashed production in the late 1990s, at a time oil was selling for about $10 (U.S.) a barrel.
Saudi Oil Minister Ali Naimi speaks to reporters at the OPEC meeting in Oran, Algeria. Ouahab Hebbat/AP
Enlarge Image

Saudi Oil Minister Ali Naimi speaks to reporters at the OPEC meeting in Oran, Algeria. (Ouahab Hebbat/AP)
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Russian Deputy Premier Igor Sechin and Azeri Energy Minister Natik Aliev said separately their countries would reduce output by a total of more than 600,000 barrels a day.

Mr. Naimi first mentioned the 2 million figure in Oran on Tuesday, the eve of the oil ministers' decision making meeting. Asked Wednesday if he stood by that figure, he told reporters “that's the correct number.” Later, he said the cut would take effect Jan. 1, pending formal approval by the ministers.

Mr. Sechin, in comments to The Associated Press, said “Russian oil companies have already made a decision to cut deliveries to the market ... approximately equivalent to 350,000 barrels per day.”

“As soon as OPEC makes the decision, Russian companies will immediately follow,” he said.

Mr. Aliev said his country, too “will support the OPEC cuts,” slashing up to 300,000 barrels a day from Azerbaijan's output. That would be more than a third of total production for the country on the oil-rich Caspian Sea.

Mr. Aliev said his government had calculated the 2009 budget based on an oil price of $70 a barrel, and would have to compensate for the loss of money by tapping into a strategic government oil fund. Oil prices have plunged stunningly in recent months to less than $50 a barrel from $147 a barrel in July.

That might be good for consumers already straining from the financial crisis. But — like Azerbaijan — OPEC and non-OPEC producers are hurting from levels that are in some cases now below what's needed to balance their budgets or earn a profit.

Oil producers fear a drawn-out lull in prices could hurt investment and lay the groundwork for another sharp price spike when the world's economy rebounds.

“There's always been some finger-pointing at OPEC, but now even some (rich consuming nations) are saying maybe prices have gone too far,” Olivier Jakob of energy analysis firm Petromatrix in Switzerland said ahead of the meeting. “In terms of security of supply, you are much worse at $40 a barrel than at $75.”

OPEC gave ministers ammunition to justify cuts in its latest monthly market report, released Tuesday. The bloc predicted demand for its crude oil will have fallen by 700,000 barrels per day this year, and will drop by at least twice that amount in 2009 as the worsening global economy “is expected to have a strong impact on oil demand.”

Ahead of a formal decision, other OPEC ministers also expressed sentiment for a large cut to shock the market and put a floor under prices.

Shokri Ghanem, Libya's delegate to OPEC, said that “we should make a substantial cut” and that 2 million barrels was “a very good number.”

Venezuelan Energy Minister Rafael Ramirez used similar language: “What is important is that there should be a consensus to cut production. A significant cut,” he said. Mr. Ramirez added that Venezuela, a traditional price hawk, favors a cut of between 1 million to 2 million barrels per day.

Iranian Petroleum Minister Gholamhossein Nozari did not give a number, but said that Iran would support a reduction of 2 million barrels per day.

Still, while eager to push prices higher, OPEC must weigh production cuts against the risk of driving the economies of its top customers deeper into recession.

A senior OPEC official, who spoke on condition of anonymity because he was not authorized to comment publicly, said “reasonable” OPEC nations would accept prices around $50 a barrel in the short term so as not to contribute to the world economic downturn.