OPEC’s Cuts Signal Pricing Worries

OPEC delivered a stronger-than-expected message to skeptical oil markets at its “emergency” meeting in Doha, Qatar, on Oct. 19. The 11-nation cartel said that it would cut production by 1.2 million barrels per day — some 200,000 more than the oil ministers had been tipping to the market in recent weeks.

In an attempt to convince traders that it was serious about slashing output, OPEC said that the cuts would come from current production of around 27.5 million barrels per day (plus 2 million in
Iraq) rather than from quotas, which have become somewhat fictional. OPEC also published a detailed list of cuts down to the nearest thousand barrels. They range from 380,000 barrels per day for Saudi Arabia to 39,000 in Indonesia.

The move shows that OPEC is very worried about the sharp fall in prices of around 25% from the July peak of more than $78 per barrel for West Texas Intermediate (WTI) crude. Many analysts think that unless OPEC slashes production substantially, inventories will build up rapidly in the coming months, further depressing prices. So far, OPEC’s unexpectedly hard-line position has not had much impact on the market. Prices for WTI, the benchmark U.S. crude, were at $58.75 per barrel on Oct. 20.

In the face of such bearish sentiment about the lifeblood of its members’ economies, the cartel wanted to make a display of toughness and solidarity for the benefit of hedge funds and other speculators, who have become big factors in the oil market over the last two or three years. To underline the point, Saudi Oil Minister Ali Naimi, by far the most important OPEC spokesman, said that further cuts of 500,000 or so barrels per day might be necessary when OPEC next meets on Dec. 14 in Abuja, Nigeria.

Business Week