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OPEC makes deepest-ever cut to shore up prices, but no quick fix
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09:32, December 18, 2008

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OPEC on Wednesday agreed on a deepest-ever net cut of 2.2 million barrels per day (bpd) as of Jan. 1, bringing the total output cut in 2008 to 4.2 million bpd, in another attempt to bolster sagging oil prices under the global economic slowdown.

Yet analysts say it still costs the Organization of Petroleum Exporting Countries (OPEC) several months and even further cuts to harvest at the level it is craving for, ruling out the possibility of a quick fix in the volatile market.


The decision made at the oil cartel's 151st extraordinary meeting in northwestern Algerian city of Oran came without surprise given the previous slump and a succession of pro-cut announcements by oil powers.

Chakib Khelil, OPEC's current rotating president, and also Algerian Minister of Energy and Mines, announced in Oran that the cartel "agreed to cut 4.2 million bpd from the actual September 2008 OPEC-11 production of 29.045 million bpd, effective of Jan. 1,2009," in light of observing "crude volumes entering the market remain well in excess of actual demand."

Algerian Energy & Mines Minister and current rotating president of the Organization of Petroleum Exporting Countries (OPEC), Chakib Khelil speaks at a press conference held after the end of the meeting of the Organization of Petroleum Exporting Countries (OPEC) at a hotel in Oran, Algeria, Dec. 17, 2008. OPEC announced after its 151th extraordinary ministerial conference here that it will slash its official oil output quota by 2.2 million barrels per day (bpd) from Jan. 1 next year.

Over the past five months, oil prices have witnessed a steep slide in the international markets after a record high of some 147U.S. dollars per barrel in July 11.

After OPEC's announcement of cut on Wednesday, light, sweet crude for January delivery dropped to the lowest in more than four years of some 40 dollars in the New York Mercantile Exchange, while Brent North Sea crude for delivery in January stood at some 45 dollars in London's Inter Continental Exchange, shedding more than 60 percent from its zenith.

Khelil said on Dec. 6 that OPEC, which pumps nearly 40 percent of world's oil, is to cut its oil output in a "significant magnitude" in order to stem the tumbling oil prices. He reiterated on Dec. 11 that the reduction in Oran would be "severe."

OPEC Secretary General Abdalla Salem el-Badri also hinted a further oil output cut. He told Iran's Energy and Oil Information Network in Tehran on Dec. 1 that "the organization is ready to cut production by another million barrel, which is a good amount," adding that "we are all geared towards it."

The sensitive future market has been digesting the expectation of the mega cut, which was mirrored in the recent rallies after the price touched a four-year nadir of 40 dollars on Dec. 5.


Despite its fresh ambitions to revive the crude prices, "OPEC has not been successful in being ahead of demand destruction, which has caused a drop in oil prices which is starting to have an impact on non-OPEC supply," Olivier Jakob, an oil analyst at Petromatrix, a Switzerland-based oil consultancy, told Xinhua.

The oil cartel slashed its oil output on Sept. 10 by 520,000 bpd and another 1.5 million bpd on Oct. 24, but in vain. Both of them failed to forge substantial rallies.

The Organization for Economic Cooperation and Development (OECD) forecast in November that the economy of the United States, the biggest oil consumer, will shrink by 0.9 percent next year with contraction in the first half of the year giving way to a "languid" recovery.

Prior to the meeting, the U.S. Federal Reserve decided Tuesday in a surprise move to cut the benchmark interest rate to a range of zero to 0.25 percent, the lowest level ever seen to prevent the country's ailing economy from plunging into deep recession.

The growth rate for the 27 European Union countries in 2008 is estimated to be only 1.4 percent, less than half of that in 2007.

The International Energy Agency (IEA) projected in a report on Dec. 11 that oil demand in 2008 would shrink for the first time since 1983, shedding 200,000 bpd on a year-on-year basis.

The global downturn is now still unfolding itself, chorused by a series of dire demand outlooks that haunt the traders. As a result, the market has turned into a seesaw battle between shrinking supplies and gloomy statistics and projections, at least in the coming few months.

"The demand for OPEC crude is projected to decline sharply in 2009, falling 1.4 million bpd to average 30.2 million bpd," OPEC said in its monthly oil report published Tuesday, which also put the global total demand at 85.7 million bpd.

The IEA also said in the report that the oil demand in 2009 would rebound to 86.3 million bpd, based on the hypothesis that the world economy will come to life in the second half of the year.

"The impact of the grave global economic downturn had led to a destruction of demand, resulting in unprecedented downward pressure being exerted on price," the cartel said at its meeting in Oran.

Vincent Lauerman, president of Geopolitics Central, a Canada-based energy consultancy, said the recovery might take "several months," recommending a more aggressive cut.

Moreover, non-OPEC producers must be taken into account. "In the United States, the number of operating drilling rigs is dropping and projects to develop the oil sands in Canada have been dropped one after another," said Jakob.

According to OPEC statistics, Canada is now the biggest oil supplier for the United States, whose production could enable traders to catch a glimpse of the new equilibrium.

OPEC's cut was also echoed by Russia, which sent a high-ranking delegation to the meeting and pledged a coordinated policy, but the biggest non-OPEC exporter did not give any tangible words of output cut in Oran on Wednesday.

Khelil told the press conference after the meeting in Oran that OPEC may make further cut in its next ministerial meeting in Marchat the headquarter in Vienna if the 2.2 million cut can not stabilize the market.

Lauerman also hinted the possibility of further cuts if the current one turns out to be a damp squib. "Depending on the length and depth of the global economic slowdown, OPEC may have to cut a whole lot more."


It might be intriguing to define the "fair price" in the unfolding rainy days, since the exploiting costs among the OPEC members are inevitably uneven.

A Morgan Stanley report released in early October revealed that the United Arab Emirates' fiscal accounts would remain balanced even if oil prices were to drop to around 25 dollars a barrel, and it would remain in surplus even at the current prices.

According to an International Monetary Fund report, Iran, the traditional hawk in OPEC, would suffer from deficit in current account in the near future if the oil is priced below 75 dollars.

Saudi King Abdullah bin Abudul-Aziz told a Kuwaiti newspaper Al-Seyassah on Nov. 29 that oil should be priced at 75 dollars a barrel, setting a benchmark for the next round of cuts.

The king's definition of "fair price" was endorsed by experts, who downplayed a widespread fallacy that a higher price will prolong the current global economic downturn.

"King Abdullah's recently announced target price of 75 dollars per barrel is spot on," Lauerman said.

"We do believe that the 75 dollars per barrel level proclaimed by the king ... is probably the best estimate of the fair price." Jakob said, adding that the declining price only helps the U.S. consumers. "The world is being hurt rather than being helped by the current oil prices."

According to a PetroMatrix report, gasoline at the U.S. pumps was 40 percent lower than a year ago, but consumers of other major economies still suffer from the sticky energy prices.

In Europe, the price of diesel is only 12 percent lower than a year ago. In China and India, the retail diesel prices are even 26percent and 9 percent higher respectively.


Though a rebound of oil prices seems promising in the mid-term, the organization's primitive approach of "Slash for Cash" is not as effective as it was in 1980s, when the OPEC stunned the world by boosting the price from 2.64 dollars a barrel in 1972 to 11.17 dollars in 1974 and then to 35.1 dollars in 1981.

A dearth of unity among OPEC members marred the cartel's action and diluted its influence on prices. A case in point is the recent Cairo meeting, where Saudi Arabia, the most resilient producer, managed "to push the prices lower in order to force more OPEC compliance," noted Jakob.

The oil bloc is seeking for coordinate efforts to reduce output from non-OPEC members. Delegations from Russia, Oman, Azerbaijan and Syria also attended the Oran meeting as observers.

"We renew our call on the non-OPEC producers and exporters to cooperate with the Organization to support oil market stabilization," Khelil said in Oran.

Artificially keeping production low can lead to all sorts of ancillary issues, said Conley Turner, a senior research analyst with Wall Street Strategies, an independent market research company.

"The way things are now however provides a compelling incentive to comply," Turner said.

As for the popular accusations the oil powers have made towards the volatile Western future market where the oil is priced, oil experts recommend the producers develop a modern business approach.

"OPEC could instead use the future market to hedge more of their production at what they see the fair price," Jakob said.


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