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OPEC to pare oil production 10% to block any price drop

By Seattle Times news services

	AP Delegations of member countries attend OPEC's meeting in Algeria yesterday, where the oil cartel agreed to lower output quotas by 1 million barrels a day this spring.
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In a surprise decision, OPEC countries agreed yesterday to cut oil production by about 10 percent by April 1.

The move by the 11-country body, meeting in Algeria, is aimed at supporting the current $28-per-barrel price when the weather turns warmer and reduces demand for energy.

For consumer nations, the pact looks like a threat to world economic recovery and is a reminder the Organization of Petroleum Exporting Countries appears prepared to defend prices above its official $22 to $28 target range.

In a strong warning to the cartel, U.S. Treasury Secretary John Snow said any decrease in crude-oil output would be "regrettable" and would effectively be a tax on U.S. consumers.

Speaking to reporters in Florida, Snow said energy costs were not as significant a percentage of U.S. economic output as in the past, but he added that "energy price increases are certainly not welcome."

OPEC will cut quotas by 1 million barrels a day and eliminate cheating on existing quotas by 1.5 million barrels. The group has benefited from rising demand and supply disruptions. Oil in New York has averaged $31.11 during the past year, 15 percent above the five-year average.

"The bottom line is this really just puts the nail in the coffin of the OPEC quota basket," said David Thurtell, a commodities strategist at Commonwealth Bank of Australia. "The reality is, if there still is a system, the system is that the target price is $28, and if it looks like going much below that they'll cut production."

"They are throttling the market perfectly," said James Cordier, president of Liberty Trading Group in St. Petersburg, Fla. "We are looking at firmer prices. April or May we could probably be trading in the mid to upper $30s. We could probably see spot crude test $36 or $37, I would say, as we come into the driving season."

News of the decision sparked a rise in oil prices on the New York Mercantile Exchange.
 
March futures for the West Texas Intermediate/Cushing light, sweet crude settled at $33.87 a barrel, rising $1.04 after trading as high as $34.28 on the day. Spot prices for West Texas Intermediate/Midland advanced 94 cents to $32.97 a barrel.

The OPEC cartel, which produces about a third of the world's oil, is composed of countries that often have conflicting priorities. Some members routinely exceed their shares of the overall quota, now set at 24.5 million barrels a day, so as to increase their own income. But that practice has the effect of lowering the rate that all members get per barrel.

The cartel has had mixed success at enforcing production levels. Philip Verleger, a visiting fellow at Washington's Institute for International Economics, predicted the net effect would be a cut of between 1 million and 1.4 million barrels, which would roughly keep demand and supply even and hold prices in the low $30s or high $20s. "It basically balances the market," he said.

The ministers left some uncertainty by saying they reserved until April 1 the right to rethink the quotas decision.

Oil prices have been hovering around their current comparatively high levels since the end of 2002. OPEC members have been enjoying the resulting windfalls and do not want to give them up as spring sets in, particularly at a time when the dollars they get for their oil are weaker, reducing the sellers' buying power.

"This shows that OPEC is serious about cutting production," said Phil Flynn, a senior energy trader with Alaron Trading in Chicago. "Prices, which had been moving lower recently, are set to rise further."

OPEC officially seeks to keep its benchmark between $22 and $28 a barrel. The price, based on a basket of seven crude-oil grades, fell to $28.09 Monday, the lowest since Dec. 1. The price has been above the upper limit of $28 since November.

"We hope the price will stabilize — we want it in the range" of $22 to $28 a day, Saudi Oil Minister Ali al-Naimi said. "Saudi Arabia could not countenance waiting until the next meeting to decide on a cut as that would be too late. Therefore, we decided to act now."

"It's a clever move by OPEC, giving the market some support before the second quarter," said Oystein Berentsen, head crude trader at Norway's Statoil. "But given the amount they are leaking, people will want to see how much of the cut they implement. There's a question mark over their credibility," said Berentsen, whose country is not an OPEC member.

OPEC ministers are next scheduled to review output policy March 31 in Vienna, Austria, where the group has its headquarters. OPEC's revenue last year from oil exports surged 24 percent to $242 billion from 2002, according to the U.S. Energy Information Administration.

Iraqi Oil Minister Ibrahim Bahr al-Ulum said that nation plans to export 2 million barrels a day by the end of March as production recovers. Production by that time should reach 2.8 million barrels a day, he said. Iraq pumped 2.48 million barrels a day in February 2003, before the U.S.-led invasion.

Exports in the first week of February were 1.7 million barrels a day, al-Ulum said. Iraq's oil exports averaged 1.73 million barrels a day a year in February 2003.

Mexico, Oman and Angola, three non-OPEC oil producers that attended the meeting, made no pledges to reduce oil output.

Material from The Washington Post, Bloomberg News, and The Associated Press is used in this report.

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