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OPEC to cut oil output by 10%, in two stages First cut aimed at production above existing quotas; second cut will take out another million barrels per day Bruce Stanley Associated Press Business Writer
In a surprise move, OPEC announced Feb. 10 that it would cut its excess production of crude at once and lower output quotas by 1 million barrels a day effective April 1.
The combined cuts, if effective, would curb OPEC’s actual production by about 10 percent, or 2.5 million barrels a day.
The Organization of Petroleum Exporting Countries agreed to the two-stage reduction in output to try to keep oil prices stable when warmer weather erodes demand in major importing countries.
OPEC has often urged its members to comply better with their agreed quotas, but its decision to make an additional cut in its official target of 24.5 million barrels was unexpected. Some analysts suggested that consumers would continue to face high prices for gasoline and other refined products as a result.
“As time goes on in the second quarter, we will see a drop in demand that will affect prices. If we don’t do anything, there will be oversupply in the second quarter of about 3 million barrels (a day),” OPEC president Purnomo Yusgiantoro told a news conference at a government-run convention center in Algiers.
Ministers said they believed their action would send a strong signal about OPEC’s willingness to be proactive in managing crude supplies.
“Everybody will know that the organization is serious, and we would like to have a stable market,” said Libya’s representative, Abdulhafid Mahmoud Zlitni, speaking after a closed-door meeting at which the delegates ratified their output decision. Planned April cut unconditional The planned April cut in OPEC’s formal output is unconditional, added Obaid Al-Nasseri, oil minister for the United Arab Emirates.
Oil prices rose. North Sea Brent crude for March delivery was up 69 cents at $29.80 in London, while March contracts for light sweet U.S. crude were up 60 cents at $33.43 in trading on the New York Mercantile Exchange.
OPEC’s decision to cut back oil supply may be mistimed an official with the International Energy Agency said Feb. 10.
Commercial petroleum inventories are still low, and OPEC’s plan may tighten markets into the high-demand summer driving season, which is a concern, said William C. Ramsay, deputy executive director at the IEA, the energy watchdog for the Organization for Economic Cooperation and Development.
“It’s a matter of timing,” Ramsay said. “We’re not necessarily convinced that stocks are all right. They are still low.”
“It seems that it will go into the driving season,” he said.
The IEA has previously criticized OPEC for keeping the market too tight in its effort to defend higher prices. Curb on over production shows some discipline OPEC’s emphasis on the need to curb over-production was “a sign of some discipline” that should, by itself, help keep crude prices firm in the short term, said John Waterlow, an analyst with Wood Mackenzie Consultants in Edinburgh, Scotland.
The April cut in production would bite deeper into consumers’ wallets, said Jan Stuart of FIMAT USA, a New York brokerage.
“What this means is that consumers are going to carry on paying loads of money for their gasoline for quite some time,” he said.
OPEC is still smarting after its 1997 agreement to boost production just before an Asian financial crisis that sent oil prices plummeting to US$10 a barrel. The group has tried recently to take pre-emptive steps to prevent another such price collapse. In September, it defied predictions of an unchanged production target by announcing a 900,000 barrel cut in its output ceiling. Members currently producing 1.5 million bpd in excess OPEC has a long history of pumping oil in excess of its quotas, but Kuwait’s Oil Minister Ahmad Fahad Al-Ahmad Al-Sabah said its members would be much more serious this time.
“All the signals and all the studies show that the second quarter will be a very bad quarter ... Everybody, for his benefit, has to be strict with these resolutions,” the Kuwaiti minister told reporters.
OPEC pumps about a third of the world’s oil, and its members are currently producing about 1.5 million barrels a day above their output ceiling.
When OPEC last met in December, several oil ministers predicted making cuts in their output target at this meeting to prevent oil prices from falling due to the end of winter in the northern hemisphere and a reduced demand for fuel.
A recovering U.S. economy and vigorous growth in China have boosted demand more than many had anticipated, but OPEC and many industry analysts still expect that demand will drop sharply during the April-June quarter.
“They clearly have to start cutting production now,” said Yasser Elguindi, an analyst at Medley Global Advisors, a New York consultancy.
Associated Press Business Writer Laurence Frost contributed to this report
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