DOHA, 21 October 2006 — OPEC agreed yesterday to curb its output by 1.2 million barrels per day, its first cut for more than two years, to halt a precipitous fall in prices.
The reduction, amounting to 4.3 percent of OPEC’s September production, was deeper than anticipated and the biggest since January 2002. It trims OPEC output to 26.3 million bpd from Nov. 1.
“The credibility of OPEC is at stake,” Algerian Energy and Mines Minister Chakib Khelil told Reuters before the meeting that began Thursday and ended in the early hours of yesterday.
Some ministers said a further cut of 500,000 bpd could follow when OPEC next meets in Abuja in December, to address high fuel stocks in consumer countries, particularly the United States, and a projected drop in demand for OPEC oil in 2007.
In New York, oil fell more than 2 percent to fresh 2006 lows under $57 a barrel yesterday. US crude futures were off $1.60 to $56.90 a barrel by 1803 GMT while London Brent crude fell $1.10 to $59.77 a barrel. US oil prices have dropped from mid-July records of $78.40 a barrel on healthy inventories.
In a statement issued after the meeting, OPEC expressed concern oil supplies were far outstripping demand.
“The oversupply situation and imbalance in supply/demand fundamentals have destabilized the market,” it said.
Khelil said all 10 OPEC members subject to quotas would participate in the cut. Only Iraq, struggling to get its oil industry back on its feet after war and sanctions, was exempt.
“Everybody has a share,” Khelil told reporters. Ministers were aware their failure to speak with one voice in the two weeks leading up to the hastily-arranged talks had contributed to oil’s slide to $58 a barrel this week, 26 percent off its mid-July peak and near its lowest level this year. Once in Doha the group that pumps over a third of the world’s oil presented a united front.
Saudi Oil Minister Ali Al-Naimi broke his public silence to say the world’s leading exporter fully supported the plan to cut supplies and he flagged further cuts may lie ahead. “This is not the end of the road,” he told Reuters.
Gary Ross, CEO at PIRA Energy consultancy, said it was clear OPEC meant business.
“OPEC sees itself being challenged by financial speculators and will respond aggressively to make clear to the market its price objectives and willingness to cut volumes to achieve these objectives,” Ross said.
Before the meeting Iran and Venezuela, struggling to meet their official limits, were wary of a supply-based cut that would see them ceding market share to OPEC producers that were pumping far above quota, notably Algeria. OPEC found a middle ground yesterday. To sidestep the issue of quotas and market share, it published only a list of individual cutbacks without giving the basis for the calculation or new national limits.
OPEC’s biggest member Saudi Arabia, will shoulder around 32 percent of the cut, amounting to 380,000 bpd. Iran, Kuwait and Venezuela will cut at least 100,000 bpd.
The decision by OPEC was taken at the wrong moment as demand could surge in the coming winter, the head of the International Energy Agency said yesterday.
The production cut “comes truly at a bad moment” because “demand for oil products could be strong if the winter is cold,” IEA Executive Director Claude Mandil said in a telephone interview from Paris.