OPEC unexpectedly agreed on Wednesday to revert to its 2007 production limit of 28.8 million barrels per day, a move that the group’s president said would cut production by 520,000 bpd, or about 1.8%, from July levels.
The Organization of the Petroleum Exporting Countries said it had agreed to revise its complex output targets, which its president said meant reducing supply by about 520,000 barrels per day (bpd) versus July over the next 40 days. Most analysts had expected the producer cartel to maintain formal targets at its meeting in Vienna, although some had suggested they could tighten compliance to help stem a near 30% slump in oil prices since July.
US crude for October delivery surged more than $1 early in the day, but by 0556 GMT stood 46 cents higher at $103.72 a barrel, having touched a five-month low of $101.74 on Tuesday. London Brent crude rose 26 cents to $100.60, after falling below $100 on Tuesday for the first time since April. “Since the market is over-supplied, the conference agreed to abide by September 2007 production allocations (adjusted to include new members Angola and Ecuador and excluding Indonesia and Iraq), totaling 28.8 million bpd,” the group said in a communique after a nearly five-hour meeting. OPEC President Chakib Khelil warned that he still saw surplus oil supply building on the market by the end of the year.
Analysts said the group had sent a clear message to markets, which had been battered by a recovery in the US dollar and a darkening economic outlook that has spurred an exodus of investment funds from the whole commodities complex. “It certainly shows that OPEC is not afraid to defend a $100 price level,” said Jonathan Kornafel, Asia director at US-based options trader Hudson Capital Energy.
The calculations of the new target were complicated by the inclusion of new members and the removal of Indonesia, which asked that its membership be suspended. Some analysts questioned whether the cuts would fully materialize without details on which countries would be expected to curb supply.
But others said the fact OPEC chose to make its decision explicit -- rather than merely agreed to tighten compliance with existing limits -- was significant. “We think this is a serious deal for a real cut... In this market, direction matters and this is a turn,” UBS economist Jan Stuart said in a report. But the risks to global oil demand posed by high prices and endangered economic growth still loomed large, threatening to undermine a rally that has lifted prices from $20 since 2002. “I don’t think the cut can actually stop the current downtrend in the oil market,” said Susumu Ogasawara, a manager at Ace Koeki Co in Tokyo. “The focus will shift back to falling demand and concerns about the global economy.”
The oil cartel, which controls about 40% of world oil production, agreed to meet again in Algeria on Dec 17. Later in the day, traders will seek direction from inventory data, expected to show a fall in crude stocks by 4.4 million barrels in the week to September 5 after Hurricane Gustav shut down fields, a Reuters poll of analysts found.US Gasoline stocks were seen falling by 4.2 million barrels and distillates by 2.7 million barrels.
Hurricane Ike’s progress toward the US Gulf of Mexico kept most oil and natural gas production shut in for a second week, although its path has recently shifted south and west of the biggest concentration of production platforms, aiming instead toward the Texas refining hub of Corpus Christi. (Reuters)