Opec springs output cut surprise to defend oil price

  • Business
  • Thursday, 12 Feb 2004

ALGIERS: The Organisation of Petroleum Exporting Countries (Opec) has announced a surprise cut in oil supplies from April, propelling crude prices higher and drawing a caution from the United States that it risked stunting world economic growth. 

The move slices 4% from production limits for the cartel, which controls half the world’s oil trade, to 23.5 million barrels a day from April 1. 

Opec said it would also seek immediately to eliminate 1.5 million barrels a day of leakage being pumped above existing supply quotas. 

For consumer nations, the move is a reminder that Opec appears prepared to defend prices above its official US$22–US$28 target range. 

In a strong warning to the cartel, US Treasury Secretary John Snow said that any cut in crude oil output by Opec producers would be “regrettable”, and would effectively be a tax on American consumers. 

Oil prices spiked on news of the Opec move that underlines the group’s capacity to pull a surprise after an unexpected supply reduction last September. 

At the New York Mercantile Exchange, crude oil for March delivery settled trade up US$1.04, or 3.2%, at US$33.87 a barrel on Tuesday, valuing Opec’s reference basket of crudes well above its US$22–US$28 target range. 

Leading Opec producer Saudi Arabia said that action was needed to prevent a price crash as demand slackens and world oil inventories build up after the northern hemisphere winter. 

“The inventory, where it is now, is fine; we don’t want to see it building,” said Saudi Oil Minister Ali alNaimi. “We don’t want to see a precipitous fall in prices.” 

Dealers said the agreement would protect Opec against a price slump but could undermine its credibility because of the ballooning gap between official quotas and actual output. 

“It’s a clever move 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.” – Reuters

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