Tags: oil

OPEC Cuts Output to Shore Up Falling Market

Wednesday, 10 Sep 2008 08:45 AM

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VIENNA -- The OPEC oil group announced a cut of 520,000 barrels per day to its output on Wednesday citing downside risks to the oil market as prices fell below 100 dollars for the first time since April.

After a marathon meeting that finished at 3:00 am local time (0100 GMT), late even by OPEC standards, the president of the organisation said its 13 members had agreed to begin reducing production immediately.

"If you do your own calculations, it is a cut of 520,000 barrels per day," said OPEC president and Algerian Energy Minister Chakib Khelil, announcing a new OPEC output quota of 28.8 million barrels per day excluding Indonesia — which officially left OPEC Wednesday — and Iraq.

The cut immediately boosted falling oil prices and is likely to dismay consumers hoping for bigger falls. US Energy Secretary Samuel Bodman had asked for producers to keep oil markets well supplied on Tuesday.

"The United States can order its companies (around) but not OPEC," said OPEC secretary general Abdalla Salem El-Badri in response to a question about possible concerns in Washington about the announcement.

Oil sank below 100 dollars for the first time in five months in London Tuesday when Brent North Sea crude for delivery in October dropped to 99.04 dollars in late European trade.

But prices rebounded in Asian trade. New York's main contract, light sweet crude for October delivery rose by 92 cents to 104.18 dollars a barrel while Brent North Sea crude rose 65 cents to 101.07.

Analysts had suggested OPEC would keep its official policy unchanged but would quietly agree to rein in production by cracking down on output by some members, mainly Saudi Arabia, who are pumping above their quota.

The candor of the final announcement was a widespread surprise.

Khelil said he did not expect the OPEC decision to reverse the downward trend of oil prices, which peaked at 147 dollars a barrel in July.

"My hunch is probably the price still will be going down despite the decision that we made," he said.

"I don't think this will affect the consumers in any way because first of all, there's an oversupply. Everybody agrees on that."

The stakes for OPEC were entirely different from the last time the group met formally in March when prices had broken through 100 dollars and were on a steep upwards trajectory.

The gathering this time led to questions about what price level the cartel wanted to protect as the market came down.

Iran, Iraq and Venezuela have identified 100 dollars as their minimum level for oil, while analysts see Saudi Arabia as being comfortable with a figure around 80 or 90 dollars.

"What is so magical about a hundred?" said Saudi Arabia's Oil Minister Ali al-Nuaimi on Tuesday when asked about oil's foray into double digits earlier in the day.

Explaining its decision on Wednesday, OPEC identified a shift in sentiment in the oil market linked to falling economic growth, a strengthening dollar, easing geopolitical tensions and greater supply.

"All the foregoing indicates a shift in market sentiment causing downside risks to the global oil market outlook," it said.

Economic conditions, which determine demand for oil, have worsened considerably in recent months, with many European economies facing recession, the United States struggling and fears growing about the emerging economies of Asia.

OPEC producers have to balance their desire for revenues from high oil prices against the danger that high prices could choke off feeble economic growth.

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