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OPEC to Cut Production, Officials Say

17th March 2001

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 larger reduction.

"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. pressure."

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 and 6.

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

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