10-12-04

OPEC oil ministers joined in supporting a cut in output toward production target levels early next year in a bid by the organisation’s 11 member states to stave off further falls in the world price while trying to avoid a new frenzy of buying.

The Organisation of Petroleum Exporting Countries (OPEC) still has to officially approve the decision. But comments by oil ministers ahead of the group’s formal meeting indicated that would be only a formality.

A decision to lower output toward the OPEC quota of 27 mm bpd suggested that the organisation had opted to go down the middle as it sought to stem further revenue losses.

Asked when the cut in overproduction would start, Kuwait’s Sheik Ahmad Fahad Al-Ahmad Al-Sabah said: "Everyone has committed for next month, maybe to start from February." He said all OPEC members were committed to full compliance with the current total production ceiling of 27 mm bpd and taking excess oil off the market.

Al-Sabah estimated OPEC’s overproduction at about1.7 mm bpd. Other ministers have put it at 1.1 mm barrels. OPEC would likely meet again in early February to "follow up on the situation of the market," Al-Sabah added.

Algerian Oil Minister Chakib Khelil said implementation of cutbacks would start "40 days from now". Sentiment for turning down the spigots gathered momentum when oil giant Saudi Arabia indicated it was receptive to the idea. Its oil minister, Ali Naimi, told that he supported cutting production by 1 mm bpd.

"It’s important that we stop the collapse of oil prices," Naimi told.

If OPEC decides to cut overproduction and return to its quota ceiling Saudi Arabia would cut its January production by 500,000 bpd. Libya’s Oil Minister Fathi bin Shatwan, meanwhile, said some OPEC countries would be able to start cutting back overproduction right away, while for others the process would take more time.
The OPEC meeting comes amid members’ concern about a possible oil glut in the second quarter of 2005 and prices that are now a quarter below their peaks above $ 55 a barrel. Consuming nations, meanwhile, have called on OPEC to keep output high to underpin economic recovery.

OPEC’s two other options -- doing nothing, and risking continued losses, or reducing the quota target and precipitating a new oil crisis -- were clearly not appealing to members. Their decision to try and bring output down to the set level of 27 mm barrels appeared to be a bid to reduce the risks both ways.
With the 10 OPEC members who subscribe to quotas pumping at least 1 mm bpd above their target, the decision to respect quotas means they could cut back without revising without revising production ceiling targets. OPEC’s production total reaches more than 30 mm bpd once Iraq is included. Iraq, which produces about 2 mm bpd, has been exempted from quotas to enable it to rebuild its economy.

Benchmark US crude futures have fallen by almost a quarter since the record prices of more than $ 55 a barrel in late October. The decline has been sharpest recently, spurred by increases in US petroleum inventories, mild winter weather, and little sign of a slowdown in OPEC output.
Turning downward after recovering from recent lows, benchmark light, sweet crude for January delivery traded at $ 42.30 per barrel on the New York Mercantile Exchange in electronic trade, down 23 cents from its overnight closing price. The recent fall in prices reflects replenished stocks, slowing economies, high production by both OPEC and non-OPEC countries, a relatively mild Northern Hemisphere winter, and less of the speculative futures buying that led oil to settle at $ 55.17 twice in October.

Source: Thomas Crosbie Media