The Organization of the Petroleum
Exporting Countries plans to cut oil production by approximately one
million barrels a day, or 4 percent, in an effort to buoy falling
prices, according to analysts and cartel officials at the group's
meeting yesterday in Vienna.
OPEC is expected to make an
announcement about the production cut today , and analysts said the
ultimate size of the reduction might vary somewhat, depending on the
outcome of current talks. Officials of the 10-member group, which
controls about 40 percent of worldwide oil production, have indicated
that some non-OPEC nations like Mexico may also reduce exports,
although that could not be confirmed.
News of the OPEC reduction, which is
expected April 1, bolstered prices slightly on the New York Mercantile
Exchange. Crude oil for April delivery rose 19 cents at the end of
trading yesterday, to $26.74 a barrel. Most traders do not expect the
production cut to set off a sharp jump in prices, but worries linger
that it will further rattle a United States economy weakened by
falling industrial output and consumer confidence.
"OPEC is becoming the defender
of $30 oil," said John P. Kilduff, senior vice president for
energy risk management at Fimat, the commodities trading arm of Société
Générale. "They've concluded that the world economy can handle
it, though I think that's an incorrect analysis. We've been doing
nothing but slowing down in the face of high energy prices."
The cut comes as a rebuff to
President Bush, who talked with Saudi Arabia's ambassador and the Emir
of Bahrain on the eve of the OPEC meeting. While the White House
declined to say what was discussed, it noted that Mr. Bush wanted OPEC
"to open the spigot" of oil production.
OPEC, however, appears determined to
preserve a cohesion that helped it attain the high oil prices last
year that lifted the economies of its members. Earlier in the week,
analysts had expected the cut to be smaller, because of the moderating
influence of Saudi Arabia. But the Saudis appear to have agreed to a
"There is a qualitative change
in the relations between Saudi Arabia and the U.S.," said Mehdi
Varzi, director of research at Dresdner Kleinwort Wasserstein. He
added that the Saudis "are now able to withstand U.S.
Thanks to OPEC's cohesion, its
members are confident they can intensely "micromanage the
market," said Roger Diwan, managing director for the Petroleum
Finance Company, a Washington consulting firm. OPEC is trying to
strike a balance between its own economic needs and those of
oil-consuming countries. The cartel has met every two months now for
the last year, each time tinkering with output to keep oil in the
range of $25 to $30 a barrel.
The group will meet again on June 5
The cut of one million barrels a day
would come two months after OPEC cut output by 1.5 million barrels.
But the true size of this cut will only be known in the coming months.
Despite OPEC's newfound cohesion, its members have long overproduced
to cash in on high prices.
Overproduction may depend upon two
key factors: world demand and Iraq. If demand continues to slide, OPEC
members will probably stick more closely to their production goals.
Iraq, which is a nonvoting OPEC member, has kept oil off the market
over the last few months, giving OPEC members incentive to overproduce
to pick up the slack. Iraq's oil quotas are set by the United Nations.
But analysts said Iraq had suggested
that it planned to increase exports, and that oil traders had
converged on Vienna to work out export deals with the Iraqis. If Iraq
increases exports, other OPEC members will have to refrain from
overproducing to keep prices above $25. Historically, however, OPEC
has had difficulty retaining cohesion when prices slump. Countries
produce as much as they can before prices fall even further, which
accelerates the drop.
"Will they comply with even
lower quotas for production in April than they had in February?"
Mr. Varzi said. "The compliance level is what everyone is looking
at. That will be the test of OPEC's credibility in the market."
Source: The New York Times