Article: Opec to cut output in February, "…increasing spare capacity"

Opec to cut output in February
By Ed Crooks and Dino Mahtani in Abuja and Carola Hoyos in London
Published: December 14 2006 14:31 | Last updated: December 14 2006 19:59
Financial Times

The Organisation of the Petroleum Exporting Countries on Thursday moved to reassert its power over oil prices by agreeing to cut production early next year in spite of rising concerns over tightening world crude markets.

Opec ministers meeting in Abuja agreed to cut output by 500,000 barrels a day from February 1. The move followed a 1.2m b/d cut announced in October, and sent prices higher.

Crude prices rose, with January West Texas Intermediary crude rising $1.14 to $62.53 in lunchtime New York trading. The WTI benchmark price has now risen 10 per cent in the last month.

Opec also broadened its reach by adding Angola as a member – boosting its share of world production from 40 to 43 per cent – while also calling a rare heads of state summit next year in Riyadh.

The last time Opec met in Saudi Arabia was in 1980. In its 46-year history, Opec has held only two summits of heads of state, with the most recent one in 2000 in Caracas.

Analysts saw the move as highlighting Saudi Arabia’s increasing assertiveness within the cartel, which comes as Riyadh is also stepping up its political activity in the Middle East, even at the risk of angering the US, its major western ally.

Adam Sieminski, chief energy economist at Deutsche Bank, said: “In addition to flexing its muscle externally, Saudi Arabia, with the heads of state meeting, wants to make sure that the group keeps working together for the long term.”

Saudi Arabia has played a pivotal role in Opec, in which it is the biggest producer. But, in the past, the kingdom has sought to keep a low profile within the cartel to avoid straining its relationship with the US and Europe.

In a statement, Opec said the cut was justified on the basis that there was “more than ample crude supply, high stocks levels and increasing spare capacity” in the market.

The cartel estimates that non-Opec oil production will rise by 1.8m b/d next year, its fastest rate since 1984, and that global economic growth will slow.

However, the cut was criticised by the International Energy Agency, the industrialised countries’ energy watchdog, which had warned on the eve of Thursday’s meeting that world oil markets were tightening.

Lawrence Eagles, of the IEA said: “The announcement of further cuts is unwelcome, particularly in the light of existing high prices, elevated supply risks and the onset of the peak winter heating season.”

Opec member countries had been split coming into the Abuja meeting, with some, such as Iran calling for a cut in output, and others, such as Kuwait, suggesting one was not needed.

There was also pressure on the members to deliver the 1.2m barrel a day cut in production to 26.3m barrels a day that they agreed at the previous Opec meeting in Doha in October

The ten member countries bound by quota restrictions – Iraq is exempt – have been suspected of failing to adhere to their commitments to cut output.

The IEA estimated that Opec production actually fell by only half the 1.2m b/d target last month. Opec itself believes compliance has been better, although still short of the target.

Arriving at the meeting on Wednesday Ali Naimi, the petroleum minister of Saudi Arabia, which is Opec’s biggest and most influential member, had suggested that “a bit more work” was needed, and that view appears to have been reflected in the decision. The next ministerial meeting will not be held until the middle of March next year.