Darius SnieckusOGJ Online
VIENNA, Mar. 17�The Organization of Petroleum Exporting Countries will cut crude production by 1 million b/d starting on Apr. 1 to buttress crude prices as global demand declines in the coming months, the organization's Pres. Chakib Khelil, and Sec. Gen. Ali Rodriguez Araque jointly announced Saturday.
The reduction, the second agreed by OPEC this year and at the upper end of analysts' expectations when this meeting opened yesterday, will decrease the collective output of the organization's 10 quota-bound members to 24.2 million b/d.
Khelil restated that the aim of this latest cut was be stabilize crude at $25 / bbl as the impact of the slowdown in the US economy begins to be felt worldwide, but stressed that the organization's price band would remained unchanged at $22-28 / bbl.
OPEC's also hopes its target price, said by Rodriguez to one that "fair" for both consumers and producers, will counter a sharp drop in oil demand in the second quarter, a period of historically weak demand that falls between the US and European winters and summer travel seasons.
"The slowdown in the global economy was present all the time in our analysis," said Rodriguez. "So was the traditional drop in second quarter demand, which may be as much as 2 million b/d.
"We consider this decision to be a prudent one," he added.
The total rollback to global output levels, however, may amount to a volume as high as 1.5 million b/d, as non-OPEC producers including Russia, Mexico, Oman, Angola, and Kazakhstan, all of which attended this OPEC conference as observers, promised to curb their individual production levels in support of OPEC.
Leaving today's meeting, Qatar's Minister of Petroleum Abdullah bin Hamad Al Attiyah said "all non-OPEC countries at the meeting" had offered to restrain their production. Some reports suggested this restraint will translate into a cut closer to 300,000 b/d.
In a statement, OPEC said its member countries had "strongly emphasized their firm commitment to the agreement and each stressed its commitment to continue to maintain full compliance."
Compliance remains a crucial issue, as calculations by the Washington-based Petroleum Finance Co. of OPEC member's quota reductions agreed as part of the organization's 1.5 million b/d cut in January suggest that in the region of 500,000 b/d are still on the market.
Yesterday, Brent blend closed up only 4 cents at $25.03 /bbl in London, while US light crude climbed 25 cents to $26.80 as markets reacted to news of the anticipated OPEC cut.
Saudi Arabia, Iran, and Venezuela, OPEC three most influential members, are to cut their production levels by 324,000 b/d to 7,865 million, 146,000 b/d to 3.552 million, and 116,000 b/d to 2.786 million, respectively. The remaining OPEC members will reduce output as follows:
Algeria 32,000 b/d
Indonesia 52,000
Kuwait 80,000
Libya 54,000
Nigeria 82,000
Qatar 26,000
United Arab Emirates 88,000
"The critical factor (in determining what effect OPEC's production cut will have on crude prices) is going to be demand," said Mehdi Varzi, director of research at Dresdner Kleinwort Wasserstein AG, "and how much the turmoil in the financial markets effect commodities markets.
"We know there will be an effect over time, but if economic growth gets hit, then demand is going to get hit. Demand for OPEC oil may not grow as people think in the second half of the year," he said.
"Everyone is assuming (that) at some stage OPEC will have to raise the quotas. But there is a question mark. There is no guarantee of this," said Varzi.
The International Energy Agency has said softening demand for oil is "increasingly apparent" across most key regions markets with emerging economies, because of a dependence on US imports to balance their payments, confronting the twin problems of high oil prices and fallout from the North American downturn.
Iraq is another unknown variable in the oil price equation. According to recent IEA figures, Iraqi production climbed by 320,000 b/d in February. As the sole OPEC state not bound by OPEC quota, Iraq, according its Minister of Oil, Amer Mohammed Rasheed, aims to ramp up its output level by the end of this month to around reach 3 million b/d, of which it plans to export some 2.4 million b/d.
Varzi is concerned there may be a countervailing force at work on Iraq's "gradually recovering" production level, if credence is given to Iraqi claims that the United Nations, under pressure from US and UK governments, is attempting to tighten the pricing formula agreed as part of the UN's sanction scheme to curb the Middle East state's premium.
"If (the UN) does that, you wonder why the Iraqis should export. I think Iraq is going to a very uncertain factor over the next 3-4 months," he said.
Dresdner Kleinwort Wasserstein calculations support the belief that OPEC will be able to defend the bottom end of its $22-28 /bbl price band this year, Varzi added.
Contact Darius Snieckus at [email protected]
