CBSN

OPEC Surprises With Cut

oil opec 091500
AP
Defying expectations, OPEC plans to cut its oil production target by 3.5 percent beginning in November, Kuwait's oil minister said Wednesday.

The Organization of Petroleum Exporting Countries still must approve the cut, which would reduce the cartel's output ceiling by 900,000 barrels a day to 24.5 million barrels. The group's delegates were to meet later in the day to ratify their output decision.

Kuwaiti Oil Minister Sheik Ahmad Fahad Al-Ahmad Al-Sabah confirmed the plan after the 11-member group broke up for lunch following informal talks at OPEC headquarters in Vienna.

"OPEC will cut 900,000 barrels a day from November 1," he told reporters.

OPEC President Abdullah bin Hamad Al-Attiyah wouldn't confirm the planned cut but said the group would meet again Dec. 4 to reassess market conditions.

OPEC had been widely expected to keep its daily production ceiling at 25.4 million barrels. However, a recent slide in prices and OPEC's expectations of a surge in oil inventories among major importing countries have raised fears about a further softening of the market.

OPEC pumps about a third of the world's oil, and its policies can have a significant impact on retail prices for heating oil and gasoline.

OPEC wants to keep the price of its benchmark blend of crudes stable within a targeted range of $22-$28. The benchmark price stood at $25.14 on Tuesday, the most recent day for which OPEC calculated it.

OPEC included Iraq in its informal policy discussions for the first time since the ouster of former Iraqi President Saddam Hussein. Despite the earlier objections of Venezuela, Iraq was to join also in the formal meeting later Wednesday.

Iraq did not seek a production quota of its own. Iraq is only producing about 1.8 million barrels of oil a day — 700,000 barrels less than on the eve of the war in that country. It now exports some 900,000 barrels a day, Iraqi oil minister Ibrahim Bahr al-Uloum told a news conference after the informal talks ended.

OPEC appeared to overcome its earlier fears that Iraq might quickly restore its prewar output and flood the market with crude. Chronic sabotage of Iraq's oil pipelines continues to hamper its exports, and the country's recovery is taking much longer than expected.

However, the prospect of a sharp seasonal dip in demand in the early months of 2004 seemed to persuade the group to make a preemptive production cut in November to bolster prices.

Crude oil futures soared on reports about OPEC's decision. Contracts of U.S. light, sweet crude for November delivery were trading at $27.99 a barrel, up 86 cents, on the New York Mercantile Exchange. November contracts of North Sea Brent crude rose 98 cents to $26.50 a barrel on the International Petroleum Exchange in London.

Iraqi delegates returned to the table at the cartel's headquarters after Venezuela backed down from its opposition to Iraq's full participation in talks on output strategy.

Venezuela had argued earlier that Iraq, a founding member of OPEC, should not attend the group's formal meeting because its government has no U.N. recognition. Iraqi oil minister Ibrahim Bahr al-Uloum, backed by OPEC's other members, maintained his country had a right to participate as a full, voting member.

Venezuelan Oil Minister Rafael Ramirez said Wednesday he would respect the consensus of his fellow OPEC members, though he would register an objection.

"We also will attend the meeting, because we don't want to provoke a crisis within OPEC," Ramirez told reporters.

OPEC representatives conferred over breakfast with delegates from six independent, non-OPEC producers including Russia and Mexico. OPEC is seeking a commitment of cooperation from independent producers to help keep oil prices stable as an imbalance between supply and demand looms early next year, OPEC Secretary-General Alvaro Silva said after the breakfast meeting.

The United States consumes 19.7 million gallons of petroleum daily. Last year, it imported more than 3.3 billion gallons. Most of that (55 percent) came from non-OPEC countries. The biggest importers were Saudi Arabia, Mexico, Canada, Venezuela and Nigeria.

A stable oil price is important to many OPEC countries because the petroleum business represents a dominant part of the economy. In Saudi Arabia oil represents 90 percent of export earnings, three-quarters of tax revenue, and 45 percent of total domestic product. Swings in oil prices could be very damaging in such an economy.