- The Washington Times - Friday, December 10, 2004

CAIRO — OPEC agreed yesterday to reduce its daily oil output by 1 million barrels a day — and reserved the right to cut deeper early next year if crude becomes much cheaper.

But traders said they were taking a wait-and-see attitude toward the pact, and sent oil prices sharply lower.

The move by the Organization of Petroleum Exporting Countries is intended to prevent further revenue losses amid falling prices, without creating the kind of volatility that sent prices to record highs earlier this year — forcing producers to scramble to meet demand.

Saudi Oil Minister Ali Naimi said the cut will be implemented starting Jan. 1. He told reporters that OPEC would meet again in late January to review the cut’s effect on prices, which have fallen sharply recently but remain high above previous established levels.

If effective, the output reduction would scale back output to 27 million barrels a day, the group’s official production ceiling that OPEC has been exceeding for months now because of the high demand.

Benchmark U.S. crude futures have fallen by almost a quarter since the record prices of more than $55 a barrel in late October, as consuming nations have called on OPEC to keep output high to underpin economic recovery. The decline has been sharpest in the past week or so, spurred by increases in U.S. petroleum inventories, mild winter weather and little sign of a slowdown in OPEC output.

In trading yesterday, benchmark light, sweet crude oil futures for January dropped $1.82 to $40.71 a barrel on the New York Mercantile Exchange. In London, Brent crude oil for January fell $2.29 to $37.38 a barrel on the International Petroleum Exchange.

Marshall Steeves, energy analyst at the New York-based brokerage Refco Group Inc., said traders aren’t taking OPEC’s pledge to rein in production at face value. “You have to see if the proof is in the pudding,” Mr. Steeves said, noting that it will be more than a month before the changes are felt in major consuming markets such as the United States.

A lot of the extra crude oil OPEC has been putting onto the market is high in sulfur content, thus less desirable to many refiners. The loss of that supply isn’t so critical, Mr. Steeves said.

Moreover, OPEC’s action was not intended to prop up prices immediately, but rather to prevent sharp declines next spring.

OPEC’s two other options — doing nothing, and risking continued losses, or reducing the quota target and precipitating a new oil crisis — were clearly not appealing to members. Their decision to try to end quota busting appeared to be a bid to reduce the risks both ways.

Still, the decision to meet again Jan. 20 was meant as a signal that OPEC was ready to defend current prices — a message emphasized at the Cairo meeting by several oil ministers.

“We will implement this cut and watch the market,” Libya Oil Minister Fathi Hamed Ben Shatwan told reporters. “If there are good prices, then fine. If prices keep dropping, then we’ll take new action.”

In another bid to keep markets from roiling, the 11-nation group resisted pressure from some members to raise its target rates — the prices it sees as fair — for OPEC crude.

That band is now at between $22 and $28, below the lower $30s some members would like to see it at and far under present market prices.

Oil ministers made it clear that the bar had been raised at least informally.

Naming $32 as his country’s bottom line, Iran Oil Minister Bijan Namdar Zangeneh, told reporters: “We are concerned about prices dropping.

“We should be very careful and monitor the market very closely,” he added.

OPEC Secretary-General Purnomo Yusgiantoro of Indonesia touched on the need for stability after months of “excessive speculative activity.”

He said the group would reassess its current price band at the January meeting in Vienna, Austria.

Sentiment for cutting back the spigots gathered momentum earlier this week when oil giant Saudi Arabia indicated it was receptive to the idea.

Mr. Naimi suggested OPEC was braced for some further drops in world crude prices, despite recent sharp declines.

“We have done everything to moderate the price,” the Saudi minister said, alluding to overproduction in recent months. “It is moderating and it will probably moderate more.”

Earlier, the London-based Al-Hayat Arab newspaper reported that if OPEC decides to reduce its excess production, Saudi Arabia — responsible for most of the overcapacity — would scale back its January output by 500,000 barrels a day.

In recent months OPEC’s members had been pumping more than 30 million barrels a day with Iraq included. Iraq has been exempted from quotas to enable it to rebuild its economy.

But an international energy monitoring organization said yesterday that because of violence and other problems in Iraq, its production fell sharply last month, dragging down total OPEC output.

Iraq produced 1.35 million barrels a day in November, down 400,000 barrels from the previous month, the International Energy Agency said. Factoring in that downturn, OPEC pumped 29.4 million barrels daily last month, it said.

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