ALGIERS, 11 February 2004 — OPEC surprised oil markets yesterday by announcing it would be producing 2.5 million fewer barrels per day (bpd) of crude as of April 1 in an effort to keep prices from falling when demand drops in spring in the northern hemisphere.
The Organization of Petroleum Exporting Countries, which produces a third of the world’s oil, said after a meeting in Algiers that it was reducing its “24.5 million bpd ceiling by one million bpd to 23.5 million bpd, effective April 1,” according to a joint statement from the 11-nation group.
In addition, production over this quota that had been stimulated by high demand and high prices is to be eliminated by the end of March, with the excess estimated at 1.5 million bpd, OPEC ministers said.
The statement said there would be “strong commitment from member countries to comply with these agreed production levels.”
But Obeid ibn Saif Al-Nassiri, oil minister of the United Arab Emirates underlined the two-step nature of the decision when he said it would be reviewed at OPEC’s next meeting, on March 31 in Vienna.
“If we see no need for a cut we may reverse the decision,” he said.
Oil prices immediately shot up. The price of a barrel of reference Brent North Sea crude oil for March delivery climbed 66 cents from the previous close to $29.77 in late trading in London.
New York’s benchmark light sweet crude March contract gained 75 cents to $33.58 per barrel in early deals.
OPEC President Indonesian Oil Minister Purnomo Yusgiantoro said: “Our projections indicate that there will be a significant surplus of oil in the second quarter of this year, and if this is not handled in a timely and effective manner, there is likely to be downward pressure on prices.”
He said this could cause “volatility in the market, which will be in nobody’s interests.”
Analysts seemed to agree.
The two-stage reduction appeared to be aimed at dissuading US investment funds from selling out of the market, said Societe Generale analyst Frederic Lasserre in Paris.
“OPEC wants to reassure the investment funds that there’s no risk of a sharp fall in prices,” he said.
“There’s still probably going to be some cheating (on quotas by OPEC members),” said Adam Sieminski, analyst at Deutsche Bank in London.
“So the net result might be they’re reducing production by one million bpd, and that is going to be just about enough to hold the market steady,” he said.
“This decision seems to be aimed at trying to bring the price down a bit but avoiding a real sharp drop,” said Sieminski. OPEC ministers were also concerned about loss in value from the falling dollar, as oil prices are in the US currency.
Iranian Oil Minister Namdar Zangeneh said OPEC was interested in keeping oil prices at the upper end of the organization’s official price band of $22-$28 for a reference basket of crudes.
The production cut was decided in order “to keep in the upper part of the band”, which means stopping oil prices from falling below $25 a barrel.
Yusgiantoro said: “While oil producers cannot take direct measures to support the dollar, we can at least minimize the impact of its decline by ensuring that oil prices remain at reasonable levels.”
Most traders had expected OPEC to put off an output cut until its March 31 meeting to avoid irking consumers grappling with high prices during the peak demand season of winter.
An analyst present in Algiers who wished to remain anonymous said that OPEC could not cut output in March for political reasons since it would go over badly in the winter season.
Algerian Oil Minister Chakib Khelil was quoted by Algeria’s El Moudjahid newspaper Sunday as saying that current high prices were distorted because of low inventory stock in the United States and the cold weather there.
