OPEC Cuts Deep To Boost Prices Amid Doubts On Compliance

DOHA Oct 20, 2006 (Dow Jones Newswires)

Moving to shore up oil prices at a time of burgeoning crude stocks across the world, OPEC agreed to cut oil production for the first time in almost two years, pledging to take a larger-than-expected 1.2 million barrels a day off global oil markets.

After an emergency meeting in the early hours of Friday morning in the Qatari capital, the Organization of Petroleum Exporting Countries agreed the cut will take effect Nov. 1 and apply to 10 of the group's members, excluding Iraq. It will reduce actual output from the cartel to 26.3 million barrel from 27.5 million barrels a day and represent a 4.3% decrease from OPEC's September output.

The surprise decision - which accounts for just over 1% of global consumption - gave an immediate boost to oil prices, which had already jumped on Thursday after Saudi Arabia's powerful oil minister Ali Naimi went public for the first time with his support for a cut. OPEC's decision also quickly sparked questions over whether the cartel could enforce such a cut at a time when oil prices, though well off their record peaks, remain historically high.

Saudi Arabia, the group's de facto leader, is set to shoulder about a third of the cut, with a decrease in Saudi output of 380,000 barrels a day. This brings production in the kingdom, which has already been quietly paring its output this year, to 8.7 million barrels a day, its lowest level in some two and a half years.

The cut is OPEC's first since December 2004, when it called on members to slice 1 million barrels a day from overproduction and - like now - left OPEC's nominal quota system unchanged. But the group has a patchy record in enforcing compliance with production cuts and is set to face particular scrutiny now because several of its members are pumping way above their allocated quotas while others are struggling to meet theirs. Each camp may prove reluctant to stem the cash flow into their budget coffers from lucrative oil sales.

Peter Beutel, president of trading advisory firm Cameron Hanover in New Canaan, Conn. suggested the higher-than-expected cut "could be a way of sandbagging to get closer to (an actual cut of) a million barrels."

Avoiding Nightmare Crash

Still, observers don't doubt the intention of the group to avert a free fall in oil prices, particularly with the memory of the devastating price crash of the late 1990s so fresh in their minds. A former U.S. government analyst familiar with Saudi thinking, said the move signals determination on the part of the kingdom to stabilize prices around current levels.

Oil prices around "$55 to $60 seems to be what their target is," he said. "The Saudis need these prices to keep paying their people and buying cooperation and to keep their defense and security expenditure too high."

OPEC has been alarmed at the 25% slide in benchmark prices since July and fearful of a coming slowdown in demand that could tip prices even further to the downside.

Still, they will need to tread a fine line in building credibility in the eyes of the market heading towards the winter in the Northern Hemisphere, which some analysts believe will boost prices and make a noticeable dent in historically-high oil stocks in large consuming countries.

"I think we can count on the Saudis cutting what they say but it comes down to compliance now and whether they can act like a cartel when prices are still very high at $58 a barrel," said Beutel. He expects an actual cut of between 860,000 and 920,000 barrels a day.

Jason Schenker, an economist at Wachovia Securities in Charlotte, N.C., said the cut should help keep oil prices around $60 a barrel, which many analysts believe is OPEC's perceived line in the sand.

"The cut is probably being implemented to support prices before they head below $55," he said. "I think they're actually defending $50 in the event we have a warm winter."

OPEC is also casting an increasingly worried eye toward oil producers not in the cartel. The group on Monday expressed concern about the outlook for world oil demand and said it saw greater supplies coming from producing nations that are not part of OPEC.

In its monthly oil market report for October, the 11-nation producer group trimmed its 2006 global oil demand outlook by 100,000 barrels a day from its September report.

"As you know the demand in the third quarter has come down and demand will be much lower in the second quarter, of 2007" said Algerian oil minister Chakib Khelil. "At the same time any increase in demand for the year 2007 will be met with supplies from non-OPEC producers."

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