Opec reduces oil supply

VIENNA // Opec unexpectedly said it will reduce oil production at a meeting in Vienna yesterday, pledging to stick rigidly to formal output targets. The announcement halted the slide in the oil price, with Brent North Sea crude for delivery in October at US$100.77 a barrel yesterday, a rise of 43 cents from Tuesday's close. Chakib Khelil, the Opec president, estimated that producers' reversion to quotas announced in September last year would immediately remove 520,000 barrels of oil from the market, equivalent to 1.7 per cent of the group's current output. The output quotas do not match the production of the biggest Opec producers, however, and some analysts and traders appeared sceptical that the change would have a measurable effect on prices. "I was actually surprised that they announced any kind of cut," said Dalton Garis, an associate professor of economics and market behaviour at the Petroleum Institute in Abu Dhabi. "We don't know if this new thing is actually going to cut supplies that much. It depends on how it's read." Analysts had expected Opec, which controls almost half of the world's oil supply, to keep its output targets unchanged and publicly gloss over excess supplies added earlier this summer when prices hit a record US$147 a barrel. Manouchehr Takin, an analyst at the Centre for Global Energy Studies in London, said he was surprised that the price had not moved significantly, since traders had predicted some reduction in Opec output, albeit without a public announcement. Opec said it was acting to correct an oversupply of oil on the market that emerged when a number of producers in the group, led by Saudi Arabia, increased production beyond quotas to counteract record high prices this summer. "Since the market is oversupplied, the conference agreed to abide by September 2007 production allocations, totalling 28.8 million barrels per day (bpd), levels with which member countries committed to strictly comply," Opec said, noting the numbers were adjusted for the expected departure of Indonesia from the group and the addition of Ecuador and Angola last year. Abdalla el Badri, the Opec secretary general, suggested the production cuts would be borne by member states producing beyond quotas, an implicit reference to Saudi Arabia. "What we are saying [is] those who are overproducing should go back to their allocation as it was in September," he said. The relationship between formal quotas and actual production is complicated, however. Some members, such as Venezuela and Nigeria, are not meeting their allocations, while Saudi Arabia is producing close to 9.7 million bpd - partly to make up for others' shortfalls - which is more than 700,000 barrels per day above its formal target. The kingdom has also been reluctant in the past to make unilateral production cuts without having fellow member states share the burden of reduced revenues. In addition, the September 2007 figures cited in the communiqué by Opec officials were rejected at the time by Venezuela, and the Opec secretariat no longer publishes a detailed breakdown of quotas for each member. Opec noted that weakening global economic growth and a shift in sentiment on the oil markets now presented "downside risk" to prices. It agreed to watch the market closely until its next meeting in Algeria on Dec 17. In the days before yesterday's meeting, Opec ministers were publicly split over whether the group should continue to let oil prices slide or step in to head off a forecast supply overhang of close to one million bpd early next year. Early on Tuesday, Ali al Naimi, the Saudi oil minister who is the most influential member of the group, said the market was "in a very healthy position", suggesting no change was necessary. The Iranian minister, Gholamhossein Nozari, had argued the opposite, characterising the market as "oversupplied". "They tried to walk a middle line here," Mr Garis said. "I think it's not clear that the Opec announcement will have very much effect." Asked what the impact of the proposed reduction would be on prices, Mr el Badri said he hoped it would curb the decline in oil prices, which have fallen 30 per cent since July. "The market was coming down very dramatically," he said. "We hope it will relax now." Since oil prices broke above $100 at the beginning of the year, ministers have insisted that Opec was not responsible for the run-up. They emphasised other factors, including a weakening US dollar, an inflow of hot money into commodities, and tension between Iran and the US. The fall in the price of oil "vindicates what we have been saying over the past year about the enormous impact the non-fundamental factors have been having on oil price volatility", Mr Khelil said before the decision. "This explains why we were reluctant to respond to calls to increase our production when prices were rising persistently, because we knew we would be treating the illness with the wrong medicine." Hours before Opec made its announcement, the US Department of Energy cut its forecasts for world oil demand and reduced its forecast of how much oil would be produced by countries outside of Opec this year. Yesterday, the International Energy Agency mirrored the US forecasts in its own market report, which revised downwards its forecasts for oil demand and non-Opec production. Demand forecasts have been revised lower each month as the industrialised world heads toward recession, partly driven by record energy costs. @email:cstanton@thenational.ae @email:tashby@thenational.ae