Advertisement
  1. Archive

As expected, OPEC cuts back on oil output

OPEC on Saturday decided to cut its official oil output by 4 percent, or 1-million barrels a day, in an effort to avoid supplying markets with too much crude at a time of weak seasonal demand.

The oil ministers had decided on the 4 percent cut Friday but adjourned without reaching a final agreement on the details.

By cutting crude production for the second time this year, the Organization of Petroleum Exporting Countries hopes to halt the recent slide in oil prices that offered hope of cheaper fuel for consumers in the United States and other importing nations.

In Washington, the Bush administration called the decision disappointing in light of a struggling world economy.

The action "demonstrates the importance of increasing America's domestic production and developing a national energy policy that will ensure a stable, reliable, affordable and diverse supply of energy," Energy Secretary Spencer Abraham said in a statement Saturday.

But some energy analysts suggested that next month's production cut won't have a significant impact on consumer prices for gas and other refined products.

"On a retail level, prices will probably firm up a little bit, but they're not going to spike as they did last year," said Lawrence Eagles, head of commodity research at the London brokerage GNI Ltd.

The cartel announced its cut, which was at the upper end of most analysts' expectations, after two days of talks in Vienna.

OPEC delegates debating the size of the decrease were forced to consider the effect the current slowdown in global economic growth has on demand. Consumer confidence has eroded, with share values plummeting from New York to Tokyo. The cartel already was expecting demand to ease somewhat in the next few months because of warming weather and a decline in purchases of heating oil in many key markets.

"The present weaker world economy and the traditional sharp downturn in demand associated with the second quarter both clearly point to the need for a correction in oil supply, and the conference has taken the decision to stabilize the oil market," OPEC said.

As of April 1, OPEC will trim its output quota to 24.2-million barrels a day from its current level of 25.2-million barrels. Analysts had generally forecast a decrease in output of at least 500,000 barrels a day.

However, the extent to which individual OPEC members will comply with their new targets is unclear. Venezuela and Nigeria, among others, have had a history of busting their quotas.

Last month, the cartel produced some 500,000 barrels above the daily target it set in January, when OPEC members agreed to top 1.5-million barrels off their previous quota.

This overproduction means that even if OPEC reduces its official output by 1-million barrels a day, the actual decrease in output might equal only half that amount.

Oil markets were closed Saturday but had surged higher, then retreated Friday on the likelihood of a cut in OPEC production. Contracts of light, sweet crude for April delivery closed at $26.74 a barrel, up 19 cents, on the New York Mercantile Exchange.

"I think a million barrels a day is already more or less factored into the market," said Mehdi Varzi, a senior oil analyst at the investment bank Dresdner Kleinwort Wasserstein in London.

YOU MIGHT ALSO LIKE

Advertisement
Advertisement