OPEC May Not Have Timing Right with Cuts

OPEC's decision to cut back oil supply makes some sense given the drop in demand expected this spring, but may be mistimed an official with the International Energy Agency said Tuesday.

Commercial petroleum inventories are still low, and the Organization of Petroleum Exporting Countries' plan to lower its output ceiling beginning April 1 may tighten markets into the high-demand summer driving season, which is a concern, said William C. Ramsay, deputy executive director at the IEA, the energy watchdog for the Organization for Economic Cooperation and Development.

"It's a matter of timing," Ramsay said. "We're not necessarily convinced that stocks are all right. They are still low."

"It seems that it will go into the driving season," he said.

The IEA has previously criticized OPEC for keeping the market too tight in its effort to defend higher prices. The U.S. Department of Energy said Tuesday OPEC should keep in mind the implications for U.S. economic growth when making its production decisions.

OPEC ministers surprised markets for a second time in six months Tuesday, announcing a plan to slash supplies by 9% in an effort to support prices at high levels when winter demand ebbs and compensate for the erosion of their revenues by a weakening dollar.

The two-part decision involves an immediate commitment to cut back 1.5 million barrels a day in quota cheating and then a 1 million barrel a day cut to quotas beginning April 1. Analysts estimate the 11-member group, which produces a third of the world's oil, is pumping some 28 million barrels a day.

The IEA expects demand for OPEC oil to drop about 10% in the second quarter to 23.3 million barrels a day - about 4.7 million barrels a day below the group's estimated current output.

The move wasn't irresponsible, but an effort by the group to cope with the expected drop in demand, Ramsay said.

"We more or less expected the first part," he said, referring to OPEC's plan to tighten compliance with quotas.