Posted on: Thursday, September 25, 2003

OPEC cut catches market off guard

By Bruce Stanley
Associated Press

VIENNA, Austria — In a surprise move, the OPEC oil cartel cut its production target for crude to counter an expected decrease in demand early next year.

The Organization of Petroleum Exporting Countries decided yesterday to lower its output ceiling by 900,000 barrels a day to 24.5 million barrels starting in November.

The 3.5 percent cut startled the market, where oil futures jumped more than $1 a barrel.

White House spokesman Scott McClellan, with President Bush in New York, would not comment directly on the OPEC move but said the economy depends on stable oil supplies and prices.

One analyst said he expected the action would keep gasoline and heating oil prices that consumers pay near current levels. OPEC pumps about a third of the world's crude.

OPEC's decision came after a meeting that also saw Iraq's return to the group for the first time since the ouster of Saddam Hussein and despite earlier objections from Venezuela.

Although the market currently is "well supplied," OPEC is taking preventative action to try to keep prices stable before an expected dip in seasonal demand in the first quarter of 2004, said OPEC spokesman Omar Ibrahim.

At current output levels, OPEC predicts that the daily supply of crude will outstrip demand by 2.5 million barrels by next April. Iranian Oil Minister Bijan Namdar Zanganeh, speaking earlier, called the cut a possible "first step" and did not rule out an additional reduction later in the year.

"It is better that we start before we witness a very bad situation in the market," he told reporters before the group's oil ministers met in private to approve the cut.

OPEC wants non-OPEC producers such as Russia to take "concrete measures" to restrain their own output, Ibrahim said, but the cartel is not making its cut conditional on their cooperation as it did in December 2001.

OPEC widely had been 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 compounded its fears about a further softening of the market.

Iraq's gradual return to the market also was a factor.

Zanganeh noted that a cut of 900,000 barrels would return OPEC's output target to what it was until April, when the war in Iraq removed that country temporarily from the market.

Iraq, a founding member of OPEC, participated in its policy discussions for the first time since the toppling of Saddam. Iraq's new oil minister, Ibrahim Bahr al-Uloum, took his place between counterparts from Kuwait and Iran at the U-shaped table in the OPEC Secretariat.

Iraq was not seeking a production quota of its own. It produces about 1.8 million barrels of oil a day — 700,000 barrels less than on the eve of the war.

"When Iraq returns to normal production, we will discuss with Iraq how to accommodate them," OPEC President Abdullah bin Hamad al-Attiyah said.

OPEC wants to keep the price of its benchmark blend of crudes stable within a targeted range of $22-$28 a barrel.

On Tuesday, the price stood at $25.14, the most recent OPEC-calculated figure.