Trade with Commodities: OPEC MAKES DEEPEST CUT EVER

Wednesday, December 17, 2008

OPEC MAKES DEEPEST CUT EVER

Slashes 2.2M Bpd In A Bid To Build A Floor Price, But Prices Slip Further To $40

William Maclean & Barbara Lewis ORAN (ALGERIA)

    OPEC members agreed their deepest oil cut ever on Wednesday, slashing 2.2 million barrels per day from oil markets in a race to balance supply with rapidly crumbling demand for fuel. The 12 members of the Organisation of the Petroleum Exporting Countries were also aiming to build a floor under prices that have dropped more than $100 from a July peak above $147 a barrel.
    The cut, effective from January 1, comes on top of existing reductions of 2 million bpd agreed by Opec at its last two meetings. It lowers the group's supply target to 24.8 million bpd. "I hope we surprised you —if not, we have to do something about it, said Opec president Chakib Khelil, host of the conference.
    Oil fell more than $3 towards $40 following the deal, after weekly US data showed inventories in the world's biggest consumer continued to swell. US light crude fell $3.40 to $40.20 a barrel, the lowest since July 2004, while London Brent crude fell 80 cents to $45.85 a barrel.
    A deepening recession has battered world demand and fuel inventories are bulging world-wide. "The world economy is driving the price more than anything Opec can do at this stage," said Gary Ross, CEO of consultancy PIRA Energy.
    Opec president said the group would do its utmost to ensure new restraints were strictly enforced. "I can tell you it's going to be implemented and it's going to be implemented very well because we do not have a choice," said Khelil, who is also Algeria's energy minister, adding "If not, the situation is going to get worse."
    Saudi Arabia, the world's biggest oil exporter, has led by example —reducing supplies to customers even before a cut has been agreed to help push prices back towards the $75 level Saudi King Abdullah has identified as 'fair'.
    "The purpose of the cut is to bring the market into balance and avoid the gyrations of the price," said Saudi oil minister Ali al-Naimi. The cut, the third this year, brings a total reduction in Opec supply to 4.2 million bpd, nearly a 5% cut in world oil supplies. The group is due to meet again on March 15.
    Oil below $50 is uncomfortable for all producing nations, but especially for Opec members Venezuela and Iran which are dependent on higher prices to fund ambitious domestic programmes. It is hoped that a sharp supply cut will set oil on the path towards $75.
    Analysts said a limited recovery in prices would put a bit more strain on a recessionary global economy, but it may help pull the world back from the brink of deflation — a growing source of concern. The influential Saudi oil minister clearly outlined the kingdom's route to lower production. It is pumping 8.2 million bpd against 9.7 million bpd in August. Saudi Arabia's implied output target is about 8.4 million bpd under existing Opec curbs.
    According to independent observers cited in Opec's monthly report on Tuesday, the group's compliance in November to existing cuts was only just over 50%. Opechasencouraged other producers to cut back too. Russia and Azerbaijan are attending the Oran meeting as observers and have said they could rein in exports in future, but stopped short of am immediate pledge. Leading a high level delegation, Russia's deputy PM Igor Sechin said in a speech to Opec that Moscow did not plan to join in co-ordinated output cuts and did not want to join the group. — Reuters