Opec Defends $60 Global Minimum
The Organisation of the Petroleum Exporting Countries on Thursday night agreed to cut production by 1.2m barrels a day, showing its determination to defend $60 as its new minimum international price.
The cut, which was deeper than the market had expected, will take Opec production to 26.3m barrels a day if it is fully implemented on November 1.
Saudi Arabia, the world’s biggest oil producer, on Thursday warned that the cartel could make a second cut as early as December.
But oil prices reversed gains made in early Friday trading as traders questioned whether the cuts would stick. Nymex December crude fell 71 cents to $59.79 a barrel, while ICE Brent futures fell 70 cents to $60.17 a barrel.
Opec oil ministers, who had for the last two weeks been divided over how to implement the cut, on Thursday agreed that each of Opec’s 10 active members would participate on a pro rata basis, said Edmund Daukoru, Nigeria’s oil minister and Opec’s current president.
Ali Naimi, Saudi Arabia’s oil minister, told reporters on Thursday: “The price is determined by the market, what we try to do is to make the market balanced. Today there is a dis-equilibrium between supply and demand. Today we are trying to get the market to the normal equilibrium and the price will take care of itself.â€
He added that the possibility of another cut “is thereâ€.
Vera de Ladoucette, an analyst at the consultancy Cambridge Energy Research Associates, said: “Usually when the decision is taken it has already been priced into the market. But sometimes Opec can surprise. The market is going to be caught off guard today by this decision.â€
Oil producers have watched with concern as crude oil inventories have grown, indicating that the market is oversupplied.
US inventories of crude have risen in the past week by 5.1m barrels a day to levels 8 per cent above those of a year ago, according to data published on Wednesday by the Energy Information Administration, the statistical arm of the US Department of Energy.
Oil prices in the last three months have fallen 25 per cent to below $60 a barrel. Mr Daukoru said: “We have never seen a drop [in the price of oil] like this in many years.â€
But despite its price concerns, Saudi Arabia did not want to return to being Opec’s swing producer of oil, a role it played from 1980-86, when it cut supplies as prices fell. Therefore, it was imperative to get the rest of Opec on board.
The full seriousness of Opec’s resolve will only become apparent in the next two months as members either adhere to the decision or cheat by not fully cutting their share.
As divisions had appeared within Opec within the past two weeks, traders began to doubt the cartel’s ability to act.
They will be looking at whether the cuts will be adhered to by at least the cartel’s lead members.
Opec’s ambition to cut supplies comes at a cost, particularly for countries that have heavily invested their petrodollars into building up their oil sectors. Libya, the United Arab Emirates, Nigeria and Algeria have courted international energy groups to help them boost their production.
Venezuela, Indonesia, Qatar and Iran also have international oil companies working in their fields. These members of Opec will now have to tell the likes of Europe’s Royal Dutch Shell, BP, Total, Repsol and the US’s ExxonMobil and ChevronTexaco to reduce the output from their fields and forgo revenue. How much each company will have to sacrifice will depend on how Opec splits the burden of the cut among its member states.
But the news is not all bad for the companies as they will benefit from any boost in prices that follows Opec’s decision.