Opec slashes oil production - Business Report
AFP

Oran, Algeria - Opec ministers on Wednesday approved a record output cut of 2.2 million barrels a day and looked to non-member oil producers Russia and Azerbaijan to make reductions of their own.

Combined with the cuts Russia and Azerbaijan said they were prepared to implement, the OPEC move could take about 2.8 million barrels a day off the oil market at a time of dwindling prices.

OPEC president Chakib Khelil, asked about the Opec cut following a cartel ministerial meeting here, said: "It's 2.2 (million)."

Officials had earlier said the reduction would be on the order of 2.0 million barrels a day from the current output target of 27.3 million.

"We did better than what you were expecting," Khelil told journalists. "I hope we have surprised you."

The Opec action, designed to prop up prices, had the opposite effect on the market.

The price of New York crude oil sank to the lowest point in four and half years, nearing $40 per barrel.

In late afternoon trade on the New York Mercantile Exchange (NYMEX), light sweet crude for delivery in January tumbled to $40.20 a barrel - which was the lowest level since July 2004.

On London's InterContinental Exchange (ICE), Brent North Sea crude for February slid 83 cents to $45.82 a barrel. The January contract had expired Tuesday at 44.56.

OPEC ministers called the meeting here to block a steady slide in oil prices, which are now 70 percent off their high points of $147 a barrel in July, as demand dries up in recession-hit industrialised consuming nations.

Just before talks opened, non-members Russia, which attended the session, and Azerbaijan said they were ready to cut their own oil production by about 300,000 barrels a day each.

Opec officials had earlier appealed to non-member producers to help them stabilise the market. Opec Secretary General Abdalla Salem El-Badri said on Tuesday he wanted to see a cut of 500,000-600,000 barrels a day by non-members.

The appeal was renewed in the official statement.

"The Saudis are traditionally the moderates or 'doves' within the cartel and this call for so severe a cut is bad news for global consumers - unless any higher prices ultimately lead to fresh exploration and drilling," said Cameron Hanover analyst Peter Beutel.

"The big problem with a production cut of two million barrels per day or more is that it will mean that Opec will have cut nearly four million bpd this year, an amount unparalleled in history," added Beutel. Global economic momentum since July, when oil rates were at their highest, has all but collapsed as financial sector turmoil, brought on the by US subprime mortgage crisis, spread to the broader economy.

With some of the world's leading industrialised oil consumers - notably the United States, Germany and Japan -- already in recession and others such as China experiencing sharp growth slowdowns, demand for crude has plunged taking prices with it.

The Paris-based International Energy Agency has said it expects global oil demand to fall this year for the first time since 1983 and Opec officials themselves have voiced deep concern about the world's dwindling appetite for their crude oil.

The price fall is already placing significant financial strain on several Opec producers - Nigeria, Ecuador and Venezuela for example - that are heavily dependent on oil exports.

But Opec's ability to influence prices ultimately depends on whether the market believes the group will actually limit its production.

Its effectiveness is contingent on members obeying quota levels and when prices and revenues are falling there is a particular need for discipline. Some producers cheat at the expense of others by failing to implement cuts, thereby increasing their revenues.

The main problem facing Opec is that whatever steps it takes to reduce supply to shore up prices risks dampening demand further, and a decision to spark a rise in price could turn out to be counter to the cartel's best interests.

"The last thing the world's consumers need is another advance in oil prices," oil analysts Cameron Hanover said Wednesday.

"Any artificial or engineered rise in prices will exacerbate and extend the economic slowdown."

David Ernsberger of global energy information provider Platts warned that "if demand isn't somehow stimulated then all of these cuts are not going to help Opec achieve what they really want to achieve," which is stopping the slide in prices.

At the same time, the only factor that that would stimulate demand is lower prices, which Opec resists, Ernsberger added.

"They are desperate for demand to return but they are part of the problem, not part of the solution."