Petroleum Nations Move Closer
To New Round of Production Cuts
By STEVE LIESMAN and DAVID BIRD
Staff Reporters of THE WALL STREET JOURNAL
Major oil-producing nations moved closer to slashing global petroleum production, with people close to OPEC saying an agreement has been reached for an immediate 305,000-barrel-a-day cut and talks continuing on a much larger reduction.
Oil ministers from Saudi Arabia, Venezuela, Algeria, Iran and Mexico met in Amsterdam in search of a broader agreement to cut production by two million barrels a day, or about 2.6% of world output. They adjourned without an accord, but Adrian Lajous, the head of Mexico's state-owned oil company Petroleos Mexicanos, said he was confident one would be reached Friday, when the group is scheduled to reconvene. Individuals from the Organization of Petroleum Exporting Countries said Saudi Arabia had agreed in principle to cut at least 500,000 barrels a day as part of the larger reduction.
OPEC Production February figures, in millions of barrels a day:
Production
Saudi Arabia 8.10
Iran 3.60
Venezuela 2.93
Iraq 2.48
UAE 2.18
Nigeria 2.10
Kuwait 1.99
Libya 1.35
Indonesia 1.33
Algeria 0.80
Qatar 0.65
TOTAL 27.51
Source: Petroleum Argus
A final agreement would have to wait for the March 23 meeting of OPEC in Vienna, and given the history of tensions within the group, approval isn't certain.
Still, the move to cut 305,000 barrels a day would enhance the chances for a broader accord because it would resolve a long-running dispute between Saudi Arabia and Iran over last year's unsuccessful cutback agreement. The two countries had fought over the level from which Iran had agreed to cut, with Tehran arguing that its production was 3.9 million barrels daily, or 305,000 barrels a day higher than data published by official sources. Saudi Arabia said Iran never produced that much oil and thus had never actually cut back its production.
Iran Vows Reduction
Under the new plan, the members of the Gulf Cooperation Council would each reduce their own output to account for the disputed Iranian production. The council includes Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Oman and Bahrain. Iran, in return, would cut an additional 200,000 barrels daily for the larger agreement, according to the people close to OPEC.
Venezuela, the third-largest OPEC producer, will not participate in the smaller round of cuts, and it remains unresolved what role it will play in the larger agreement. Venezuela has been reluctant to cut production further, but the Saudis are likely to insist that it participate in the larger agreement.
If the cutbacks are agreed to and complied with, said Phillip Verlegger, a petroleum economist with Brattle Group in Boston, oil could rise to $20 a barrel by year end. He said rising demand from Asia, along with declining supply from producing nations where costs are highest, should tighten global supplies.
Higher crude prices are already showing up at the gas pump, reversing a 13-month stretch in which cheap gasoline has effectively put change back in drivers' pockets. But Mitch Fuqua, spokesman for the American Automobile Association's national office in Orlando, Fla., said price rises so far haven't been significant, adding only a few pennies for now in some of the regions with the lowest prices. Mr. Fuqua suggested other factors were also playing a role in rise of gasoline prices: the winter blast that recently moved through the Northeast, as well as recent refinery shutdowns and the increased driving that usually begins around this time of year.
"I don't think anybody thought we would be able to sustain a 96-cent national average price," Mr. Fuqua said.
Oil Contract Falls
Oil markets, meanwhile, showed a bit of skepticism about OPEC's ability to cut production. The price of West Texas Intermediate Crude for April delivery fell 38 cents to close at $14.31 a barrel on the New York Mercantile Exchange. Still, it remains well above its low for the year of $11.35 a barrel, hit in mid-February. The stock prices of many of the world's oil companies, however, continued to march higher.
The Amsterdam meeting marks the third time in a year that a small group of producers, including both OPEC and non-OPEC members, has discussed output cuts outside the official confines of OPEC, a sign that the oil cartel's power has weakened. But even the new process has produced only marginal results. The other two meetings last year produced accords to reduce global output by more than three million barrels a day, but less than 75% of those cuts had materialized as of February.
Beyond the perennial doubts about whether OPEC can make its agreement stick is the uncertainty about how much excess oil is actually out there. About 400 million to 500 million barrels of oil are unaccounted for in world inventories. The assumption is that these "missing barrels" will come flooding into markets when prices rise, if they exist. Thursday's decline in oil-futures prices could have been a sign of the existence of those "missing barrels."
As currently outlined, the cuts would mark a sharp policy change for Saudi Arabia, the world's largest producer. The agreement would bring the country's production substantially below the level of eight million barrels a day, which it has tried to defend for the past several years. By not insisting on substantial cuts from Venezuela, Saudi Arabia stands to lose market share in the U.S., one of the kingdom's most important markets.
Saudi leaders have vowed never again to play the role of the "swing" producer, which required it to sacrifice its own production to maintain world price levels. That policy led Saudi Arabia to reduce production below three million barrels a day in the early 1980s.
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