OPEC agrees to cut oil output by 3.5 percent in pre-emptive move
VIENNA, Austria (AP) — Members of the OPEC oil cartel have agreed to make a pre-emptive cut in their production target for crude in an effort to bolster prices ahead of an expected decrease in demand early next year.
The Organization of Petroleum Exporting Countries decided Wednesday to lower its output ceiling by 900,000 barrels a day to 24.5 million barrels starting in November.
The 3.5 percent cut startled the market where oil futures jumped more than $1 a barrel.
White House spokesman Scott McClellan, with President Bush in New York, would not comment directly on the OPEC move but said the economy depends on stable oil supplies and prices.
Asked whether the Bush administration had prodded oil-producing countries to increase prices, as Bush promised to do if necessary during his 2000 campaign, McClellan said: “We always have ongoing discussions and consultations with countries.”
One analyst said he expected the action would keep gasoline and heating oil prices that consumers pay near current levels. OPEC pumps about a third of the world’s crude.
The surprise decision came after a meeting that also saw Iraq’s return to OPEC for the first time since the ouster of Saddam Hussein and despite earlier objections from Venezuela.
Although the market is currently “well supplied,” OPEC is taking preventative action now to try to keep prices stable before an expected dip in seasonal demand in the first quarter of 2004, the group’s spokesman Omar Ibrahim told a news conference at OPEC’s Vienna headquarters.
At current output levels, OPEC predicts that the daily supply of crude will outstrip demand by 2.5 million barrels by next April. Iranian Oil Minister Bijan Namdar Zanganeh, speaking earlier, called the cut a possible “first step” and did not rule out an additional reduction later in the year.
“It is better that we start before we witness a very bad situation in the market,” he told reporters before the group’s oil ministers met in private to approve the cut.
OPEC wants independent, non-OPEC producers such as Russia to take “concrete measures” to restrain their own output, Ibrahim said, although the cartel is not making its cut conditional on a their cooperation as it did in December 2001.
OPEC had been widely expected to keep its daily production ceiling at 25.4 million barrels. However, a recent slide in prices and OPEC’s expectations of a surge in oil inventories among major importing countries have compounded its fears about a further softening of the market.
Iraq’s gradual return to the market was also a factor. Zanganeh noted that a cut of 900,000 barrels would return OPEC’s output target to what it was until April, when the war in Iraq removed that country temporarily from the market.
Iraq, a founding member of OPEC, participated in its policy discussions for the first time since the toppling of former Iraqi president Saddam Hussein.
Iraq’s newly installed oil minister, Ibrahim Bahr al-Uloum, took his place between counterparts from Kuwait and Iran at the U-shaped table in the OPEC Secretariat.
Iraq was not seeking a production quota of its own. It now produces about 1.8 million barrels of oil a day — 700,000 barrels less than on the eve of the war in that country. It exports some 900,000 barrels a day, the Iraqi oil minister told a news conference earlier.
“When Iraq returns to normal production, we will discuss with Iraq how to accommodate them. … Give them time, and then we will discuss this,” OPEC President Abdullah bin Hamad al-Attiyah said.
OPEC wants to keep the price of its benchmark blend of crudes stable within a targeted range of $22-$28 a barrel. The benchmark price stood at $25.14 on Tuesday, the most recent day for which OPEC calculated it.
Crude oil futures soared on reports about OPEC’s planned decision. Contracts of U.S. light, sweet crude for November delivery rose $1.11 to settle at $28.24 a barrel on the New York Mercantile Exchange. November contracts of North Sea Brent crude rose $1.15 to settle at $26.67 a barrel on the International Petroleum Exchange in London.
Tor Kartevold, a special adviser on the oil market for Norway’s state-owned company Statoil, argued that OPEC’s cut would have no impact on consumers. It was obvious that the market would weaken in the fourth quarter unless OPEC acted soon to scale back supplies, he said.
“I think they will have to cut further, possibly later this year,” Kartevold said.
The group plans to meet again Dec. 4 to reassess market conditions.
Iraq joined OPEC’s formal meeting on policy despite the earlier objections of Venezuela. Venezuela had argued that Iraq should not attend the group’s formal meeting because its government has not received U.N. recognition. Iraq’s Al-Uloum, backed by OPEC’s other members, maintained that his country had a right to participate as a full, voting member.
Al-Uloum said Iraq plans to remain a member of OPEC, dismissing any suggestions that the U.S.-occupied country would withdraw from the producers’ group that it helped found.
Iraq’s role in the cartel has been the subject of debate for months, with some U.S. officials suggesting it drop out to avoid the constraints of export quotas that would one day apply to its slowly recovering oil output.
Iraq has the world’s second-largest proven reserves of crude oil but is struggling to rehabilitate its oil facilities, which are suffering from years of neglect due to U.N. sanctions and from postwar looting and sabotage.