The New York Times
September 09, 2008
VIENNA — In an unexpected decision made after a six-hour meeting that lasted well into the night, the OPEC oil cartel said it would reduce its oil production by about half a million barrels a day in a bid to stem a rapid decline in oil prices in recent weeks.
Members of OPEC met Tuesday in Vienna to consider how to respond to a 30 percent drop in oil prices since July. Chakib Khelil is president of OPEC and Algeria's oil minister.
The outcome of the meeting, which ended around 3 a.m. Wednesday, represented a significant loss for moderate OPEC producers like Saudi Arabia, which had argued for the group to keep producing at full tilt.
But fears that the market was currently oversupplied while demand for oil was slowing led the group to say it would “strictly comply” with production quotas set in September 2007. Since then, the group has been producing above those levels to drive prices down.
The outcome was presented as a technical adjustment to curb the group’s overproduction, but OPEC’s president, Chakib Khelil, said the decision meant that OPEC producers would effectively reduce their overall production by 520,000 barrels a day. Oil prices traded electronically in New York jumped $2 a barrel after the decision.
In its final statement, the oil-producing group said it had noted “a shift in market sentiment causing downside risks to the global oil market outlook.” The Saudi oil minister, Ali Al-Naimi, left the meeting without any comment.
With crude oil heading down toward $100 a barrel, Saudi Arabia and other producers meeting here on Tuesday had suggested that OPEC would keep pumping at full tilt, even as some members of the cartel expressed concerns about rapidly declining prices.
Members of the Organization of the Petroleum Exporting Countries account for 40 percent of the world’s oil exports. They had scheduled the late-night session to consider how to respond to a 30 percent drop in oil prices since July. Crude oil fell more than $3 a barrel on Tuesday.
Ahead of the meeting, the cartel’s members appeared deeply split, with one camp, led by Iran and Venezuela, advocating reductions in output to stem further price declines, and another, led by Saudi Arabia, wishing to allow prices to fall further.
As the group’s representatives arrived in Vienna, Mr. Khelil, who is also Algeria’s oil minister, said the cartel would probably keep production unchanged. At a news conference held after the meeting, Mr. Khelil said the group was merely responding to oversupply in the market.
“My hunch is that prices will be going down despite the decision,” Mr. Khelil said. “There is an oversupply; everybody agrees about this.”
The decision represents a rare case of OPEC’s going against the position of its biggest member, Saudi Arabia. The Saudi oil minister had said when he arrived in Vienna early Tuesday that the market was “fairly well balanced.”
“We have worked very hard since June to bring prices to where they are now,” Mr. Naimi told reporters Tuesday morning. “We have been very successful.”
Mr. Naimi was referring to a pledge Saudi Arabia made in June at a meeting of producers and consumers in Jeddah to keep pumping at full throttle to bring prices down. The kingdom is producing about 9.5 million barrels a day, 600,000 barrels a day more than its official OPEC quota.
Oil prices peaked at $145.29 a barrel on July 3 but have been falling lately because of slowing global demand. On Tuesday, prices fell $3.08 to $103.26 a barrel in New York, their lowest level since April.
The drop partly reflected the feeling that Hurricane Ike, which killed at least four people in Cuba and forced more than a million to evacuate, will miss the oil-production platforms in the Gulf of Mexico. About 80 percent of the gulf’s offshore oil production remains shut in after the passage of an earlier storm, Hurricane Gustav.
Slowing economies and falling oil demand in major developing countries have led to a slowdown in the growth of oil consumption. As a result, many analysts agree there is more than enough oil on the market. Also, refiners typically need less oil in the third quarter, when they shut down for maintenance.
Behind their sometimes opaque language, OPEC’s leaders are forced to perform a delicate balancing act. Leaving production unchanged at a time when demand growth is slowing could precipitate a price collapse, as happened in the late 1990s when prices fell below $10 a barrel. But cutting production at today’s high levels could incur the wrath of consumers, who are already unhappy with the elevated prices. Oil has been above $100 a barrel since March.
In the days leading to the meeting, some countries, like Iran, Libya and Venezuela, had signaled that they wanted the cartel to cut production. OPEC’s own analysis suggested that the group was producing far more oil than is needed. According to Lehman Brothers, OPEC is pumping 2.18 million barrels a day more than it did last year.
Saudi Arabia is in a particularly sensitive position. The kingdom is the only country with any significant spare capacity and is in a position to impose its will on other OPEC countries. The Saudis recently brought a new field online, called Khursaniyah, which has a production capacity of 500,000 barrels a day.
But the Saudis are also keenly aware of the state of the market. Oil consumption in the United States, the world’s biggest market, is about a million barrels a day lower than last year and consuming nations have pleaded for producers not to reduce their production. Some OPEC members are also worried about a potential slowdown in demand in Europe and Asia.
Still, there was perceptible anxiety among producers at the speed of the decline in prices. The question for the cartel remains how low will prices go before the organization feels compelled to step in.
“We need to be careful that there won’t be a price collapse but that is something that does not look probable,” Venezuela’s energy minister, Rafael Ramírez, told reporters. “Looking at speculation, the dollar and other factors that have been affecting the market, maybe we are going to come to an equilibrium at around $100 a barrel, perhaps this is the level of the market.”
OPEC’s next meeting is scheduled for mid-December.
Michael Grynbaum contributed reporting from New York.