OPEC took a middle-of-the-road decision to calm the markets down. Sherine Abdel-Razek reports on the expected impact of the move OPEC ministers meeting in Cairo last week decided to cut production surplus above the official output ceiling of 27 million barrels per day (bpd) by one million barrels effective 1 January. The move was aimed at defending oil prices which have declined from a peak of $55 in October to $42 before the meeting. The 11-member cartel also discussed the possibility of production cuts next year if crude prices continue to fall. Kuwait's Oil Minister Sheikh Ahmed Al- Fahd Al-Sabah said possible cuts in the quota itself, of up to one million bpd, would be on the agenda at OPEC's next meeting on 30 January. The January meeting will also discuss raising OPEC's official price target which has remained above its upper limit for the past 12 months. OPEC's official target range is $22-$28 a barrel. OPEC countries had been pumping well above their 27 million bpd formal target this year to cool a price surge that saw US crude hit a record $55.67 a barrel in late October. But prices have fallen sharply since then, tumbling about 25 per cent as oil stocks have risen. OPEC's output cut was seen by market analysts as taking a middle-of-the- road decision. Member countries of the organisation that produces around 40 per cent of the world's oil production, had two other options: either do nothing and risk continued losses, or reduce the quota target and precipitate a new oil crisis. "This decision looks like a logical compromise between those who do not want to change quotas, led by Saudi Arabia, and those who believe that the market now needs a strong signal by reducing quotas, even if by just a symbolic amount, led by Iran," the French investment bank Societé Generale said in a research note. If OPEC members adhere to the decision, the reduction would scale back output to the group's overall ceiling of 27 million barrels a day. In recent months, OPEC's members, Iraq included, had been pumping more than 30 million barrels a day. Iraq has been exempted from quotas to enable it to rebuild its economy. Saudi Arabia Oil Minister Ali Naimi confirmed his country will cut production by 500,000 barrels a day. Saudi Arabia is chiefly responsible for most of the overproduction as it has the largest capacity to produce over quota. The proposed cut does not affect Venezuela, Iran or Indonesia, which are producing either at or below quotas. Early transactions on Monday, the first trading day after OPEC's decision, showed a revival in oil prices to $41 after refiners in Japan, the world's third biggest oil consumer which imports virtually all of its needs, said they had been told by Saudi Arabia that supplies would be chopped by eight per cent in January versus December volumes. Crude futures fell by nearly $2 a barrel to a five-month low below $41 on Friday immediately after the output cut was announced. Traders viewed the cutback as too conservative to stem sliding prices. OPEC needs the reduction to guard prices with its real revenues being trimmed by 30 per cent due to the depreciation of the dollar. However, trying to guard prices around the current level of around $40 per barrel could be difficult. "Now that the exuberance is over, Saudi Arabia knows that OPEC will have to take control of the market again," noted Societé Generale. "However, it must not fall into the trap of taking control at an excessively high price that would be too difficult to defend." OPEC delegates said the decision to cut supply was due to the slowdown in oil demand growth, which would result in an oversupply of oil of about 1.6m bpd in the first quarter and 2.8m bpd in the second quarter. The possibility of further cuts in production in January stems from the fact that demand in the second quarter usually slows down following the peak winter demand period. OPEC's member countries are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
