OPEC likely to OK 2 million barrel oil output cut

December 17, 2008 5:15:46 AM PST
OPEC powerhouse Saudi Arabia said Wednesday the group will slash a record 2 million barrels from its daily production as of Jan. 1, while Russia and other OPEC outsiders announced their own cutbacks of hundreds of thousands of barrels from the market. Saudi oil minister Ali Naimi said there was an OPEC consensus ahead of a formal agreement later in the day for the cut.

An official decision to pare 2 million barrels from output all at once would be a first for the organization. An OPEC reduction of that size four years ago was enacted in stages.

Oil prices rose above $45 a barrel Wednesday in anticipation of the record OPEC reduction.

By midday in Europe, light, sweet crude for January delivery was up $1.66 to $45.26 a barrel in electronic trading on the New York Mercantile Exchange.

Also significant would be formal support from Russia, Azerbaijan and other non-OPEC producers. Mexico, Norway and Russia slashed production in the late 1990s, at a time oil was selling for about $10 a barrel.

Russian Deputy Premier Igor Sechin and Azeri Energy Minister Natik Aliev announced cutbacks of a total of more than 600,000 barrels a day.

Still, their commitments appeared to be at least partially symbolic. The Russians indicated their reductions were already implemented in November, while Azerbaijan's output had already been reduced by about a third due to production problems earlier this year.

Naimi first mentioned the 2 million figure in Oran on Tuesday, the eve of the oil ministers' decision-making meeting. On Wednesday he said the ministers were likely to agree "on a reduction of 2 million barrels per day from what we are doing today ... a significant cut."

Naimi said OPEC's cuts will be effective Jan. 1

"We also hope that other producers who are not in OPEC will chip in for the purpose of bringing stability to the market," he said, in a nod to Russia, the top oil producer after the Saudis.

Sechin, in comments to The Associated Press, said "Russian oil companies have already made a decision to cut deliveries to the market ... approximately equivalent to 350,000 barrels per day."

In later comments he specified that his country's cuts had already been enacted ahead of the OPEC meeting, and "if the current situation stays as it is, the actions of our companies will be continued."

Sechin did hold out the possibility of further reductions, saying Russia was ready to pare another 320,000 barrels a day "if the current crisis remains on the global market."

But with Russian production falling due in part to lagging investment, it was unclear whether some of the cuts simply reflected an inability to keep up present output levels.

That - and the fact that Russia was announcing reductions already enacted - reduced the significance of its move.

Aliev said his country "will support the OPEC cuts," slashing up to 300,000 barrels a day from Azerbaijan's output. That would be more than a third of total production for the country on the oil-rich Caspian Sea.

Still, Azerbaijan's proposed cuts may be involuntary. After an accident on the main BP pumping platform in October, oil industry analysts say the country's output has dropped to around 500,000 barrels a day - the level Aliev was proposing at Oran.

Aliev said his government had calculated the 2009 budget based on an oil price of $70 a barrel, and would have to compensate for the loss of money by tapping into a strategic government oil fund. Oil prices have plunged stunningly in recent months to less than $50 a barrel from $147 a barrel in July.

That might be good for consumers already straining from the financial crisis. But - like Azerbaijan - OPEC and non-OPEC producers are hurting from levels that are in some cases now below what's needed to balance their budgets or earn a profit.

Oil producers fear a drawn-out lull in prices could hurt investment and lay the groundwork for another sharp price spike when the world's economy rebounds.

"There's always been some finger-pointing at OPEC, but now even some (rich consuming nations) are saying maybe prices have gone too far," Olivier Jakob of energy analysis firm Petromatrix in Switzerland said ahead of the meeting. "In terms of security of supply, you are much worse at $40 a barrel than at $75."

OPEC gave ministers ammunition to justify cuts in its latest monthly market report, released Tuesday, which predicted demand for its crude oil will have fallen by 700,000 barrels per day this year and will drop by at least twice that amount in 2009 as the worsening global economy "is expected to have a strong impact on oil demand."

Ahead of a formal decision, other OPEC ministers also expressed sentiment for a large cut to shock the market and put a floor under prices.

Still, while eager to push prices higher, OPEC must weigh production cuts against the risk of driving the economies of its top customers deeper into recession.

A senior OPEC official, who spoke on condition of anonymity because he was not authorized to comment publicly, said "reasonable" OPEC nations would accept prices around $50 a barrel in the short term so as not to contribute to the world economic downturn.

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Associated Press writers Angela Charlton, Alfred de Montesquiou and Adam Schreck in Oran contributed to this report.

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