WSJ(7/23): OPEC Prepares To Cut Production Of Oil
By Wall Street Journal staff reporters Alexei Barrionuevo in Houston and Bhushan Bahree in Paris
With crude prices sinking and inventories ballooning, the Organization of Petroleum Exporting Countries is preparing to approve another production cut in the next 10 days.
Saudi Oil Minister Ali Naimi, speaking in Bonn on Saturday, said the cartel is discussing a cut of one million to 1.5 million barrels a day, or 4% to 6% of its current daily output of 24.4 million barrels, excluding Iraq. The cut, which Mr. Naimi said would take effect Sept. 1, would represent an even deeper reduction than a cut of up to one million barrels a day that analysts had been predicting in recent weeks.
OPEC's timing could be dangerous. Despite perceptions that the global economy is slowing, demand usually picks up in the northern winter. A shortfall in crude inventories could tighten heating-oil supplies and send prices soaring again. However, other analysts say heating-oil and diesel-fuel inventories are 9% higher than a year ago, justifying a production cut.
Mr. Naimi indicated that the cartel believes it needs to act even before prices dip below the $22-a-barrel floor that OPEC set about a year ago for a basket of seven benchmark oil prices. The basket fell as low as $22.64 a barrel on Wednesday.
""All the sources of information are leading us to believe that we are heading toward a crisis, that demand is diminishing, supply is excessive,"" Mr. Naimi said in comments made on Friday. To keep OPEC oil prices within its target of $22 to $28 a barrel, the group ""should take drastic action to cut production,"" he said.
On Friday, Mr. Naimi's comments sent futures prices for the U.S. benchmark on the New York Mercantile Exchange up 89 cents to $25.59, breaking nine straight days of losses. Prices for the U.S. benchmark crude tend to run $3 to $5 a barrel higher than the OPEC basket.
OPEC President Chakib Khelil asked other ministers over the weekend to reach a consensus on how much the cartel should cut, said an OPEC source, who added that the cartel could make its decision in seven to 10 days. Ministers haven't decided whether to hold another special meeting ahead of their scheduled meeting on Sept. 26, or simply consult by telephone.
OPEC, which controls about 40% of the world's oil production, has already cut output twice this year by a total of 2.5 million barrels a day. It began to consider an additional cut at its July 3 meeting, after realizing that an unexpected drop in global demand and intense refining efforts had both crude- and refined-product inventories swelling.
People in the oil markets note that the number of oil contracts held by traders on the New York Mercantile Exchange stood at a five-year low on July 10, indicating strong expectations that prices will continue to fall. Some analysts think markets are relatively balanced right now and that OPEC will settle on a cutback of less than one million barrels a day. A larger cut could lead to $30 a barrel of oil again, said Adam Sieminski, an oil strategist at Deutsche Banc Alex. Brown.
Ministers also may be nervous about the impact of Iraq, which recently halted two million barrels a day of shipments for about a month, but has since restarted its exports.
Some observers believe OPEC's success over the past year at keeping prices in its target range has emboldened its ministers to try to micromanage the market. ""These ministers are like a drunken sailor at a casino in port,"" says Amy Jaffe, senior energy analyst at Houston's James A. Baker III Institute for Public Policy. ""They have been winning and there have been no consequences, and they don't think they can lose."" |
