OPEC ministers agree on plan to cut production
VIENNA, Austria (AP) – OPEC representatives have agreed on a plan that they hope will reduce the cartel’s actual production by at least 6 percent and keep prices from falling when seasonal demand for heating oil dips in the early spring, the group’s president said Thursday. Delegates of the Organization of Petroleum Exporting Countries said the agreement would lead to a net reduction of 1.5 million to 1.7 million barrels a day in the group’s actual output.
To achieve that goal, the group will take a counterintuitive approach of raising its formal target for oil production in hopes that members will adhere more strictly to the quota.
Analysts estimate that OPEC is producing about 2.5 million barrels a day above its existing target. This gap between OPEC’s target and its actual output widened during the autumn, leading many observers to question OPEC’s credibility.
Under the plan, the new target will be increased by 1.3 million barrels a day, or 6 percent, and member countries will be urged to comply more strictly with their new quotas, OPEC President Rilwanu Lukman told reporters in advance of the meeting to ratify the pact.
OPEC is fearful of oversupplying the market ahead of a seasonal, post-winter dip in demand.
The new target of 23 million barrels a day will take effect Jan. 1, and it will last until March, oil ministers said.
Delegates expressed concern that quota-busting by the cartel’s members also creates a risk that crude prices might collapse when demand for home heating oil declines with the warmer springtime weather in major importing nations of the Northern Hemisphere.
OPEC supplies about a third of the world’s crude.
In assessing the oil market, OPEC members had to consider immediate disruptions to global supplies in Venezuela and the Gulf. A national strike in member state Venezuela has paralyzed oil shipments from that country, the world’s fifth-largest crude exporter.
The strike entered its 11th day Thursday.
The unrest in Venezuela has compounded uncertainty about the impact a U.S.-led military attack might have on crude production in Iraq, home to the world’s second-largest oil reserves after Saudi Arabia.
“We wish to reassure consumers that we will do everything we can to maintain steady, secure supplies of crude at all times, to cover any eventuality that may arise. We have sufficient spare capacity within our organization to do this,” Lukman told delegates at the start of their formal session at the cartel’s headquarters in Vienna, Austria.
In New York, January contracts of light, sweet U.S. crude jumped 75 cents after Lukman’s announcement to $28.15 a barrel. Contracts of North Sea Brent crude for January delivery rose 51 cents to $26.76 a barrel in late trading in London.
OPEC supplies about a third of the world’s crude.
Several delegates expressed concern earlier that quota-busting by the cartel’s members creates a risk that crude prices might collapse when demand for home heating oil declines with the warmer springtime weather in major importing nations of the Northern Hemisphere.
Saudi Arabia, OPEC’s most powerful member, urged the group to curb excess production by up to 2.0 million barrels a day. At the same time, the Saudis wanted OPEC to raise its output target by up to 1.5 million barrels a day.
Due to the current level of overproduction, the Saudis argued that a quota increase would occur on paper only and add no fresh barrels to the market.
OPEC hopes this two-pronged approach will help restore some of the reputation for reliability that it lost in recent months because it wasn’t complying with its own quotas.
The cartel needed to do something to salvage its credibility in the market, said Falah Aljibury, an energy consultant based in Alamo, Calif.
By raising its output target to legitimize some excess production while also requiring better compliance with its quotas, the cartel sends a message that it is in better control of its own affairs. With markets thus reassured, prices should fall slightly now that OPEC has adopted the Saudi plan, Aljibury said.
The group now pumps an estimated 12 percent more than its official target of 21.7 million barrels a day.