3 Countries to Cut Oil Output in an Effort to Raise Prices

Saudi Arabia, Venezuela and Mexico, producers of 20% of the world’s oil, said they will cut global output to reverse a slump in prices that recently reached a nine-year low.

Oil ministers from the three countries, after meeting in Riyadh, the Saudi capital, pledged to cut 600,000 barrels a day, or 0.8% of the world supply. Production could fall as much as 2 million barrels a day, or 2.7%, if others cooperate with their plan, they said.

Oil prices could rise today by more than $1 to $16 a barrel in New York, after closing at $14.61 Friday, traders said. Prices have fallen 24% since November, when OPEC raised its production quota and demand from Asia slowed. Oil fetched $22 a barrel a year ago. Oil-related stocks are expected to rise, especially drillers and equipment suppliers that had been beaten down in recent months.

“If they do this through the end of the year, it should balance the oversupply in the market,” said Tom Bentz, an oil trader with Crestvale International in New York who agreed prices will rise to $16 a barrel today. “A lot of people are going to be caught with their pants down” because few traders expected cutbacks so soon, he said.

The oil slump has squeezed producers that rely heavily on oil revenue, such as those in the Persian Gulf and Latin America. The Mexican government cut $1.8 billion from its 1998 budget last month because of slumping oil revenue that accounts for 40% of its total income.

But not everyone is convinced the moves will succeed in pushing up the price of oil. “OPEC’s track record over the past 10 years has been wishy-washy at best,” said John Saucer, a trader at Salomon Smith Barney in Houston. “It’s a big step in the right direction, but it’s going to take more steps to reduce the oversupply.”

The three oil ministers said they expect other countries to announce cuts, including members of the Organization of Petroleum Exporting Countries, though details weren’t revealed.

Saudi Arabia, the world’s largest exporter and OPEC’s most influential member, said it will cut 300,000 of its estimated 8.7 million in daily output, or 3.5%.

In an unusual move by a non-OPEC member, Mexico said it will reduce daily exports by 100,000 barrels to 1.74 million barrels a day starting April 1. Mexico pumps about 3.2 million barrels a day.

Mexico said Venezuela, which has long ignored its OPEC production quota, plans to cut 200,000 barrels a day, or 5.8% of its estimated daily production of 3.45 million barrels.

The joint Saudi, Venezuelan and Mexican statement said, “Many producing countries have pledged to reduce their production by 1 million to 1.1 million barrels per day starting on April 1.” It added that in the next few days, “a bigger reduction will be announced in its final form,” without giving details.

Algeria, OPEC’s second-smallest member, said it will cut output by 50,000 barrels a day from its current production of 900,000 barrels a day, Agence France-Presse reported, citing Oil Minister Youssef Yusfi.

The plan to seek a cut in production was announced in a joint statement after the talks between Saudi Oil Minister Ibrahim Al-Naimi, Mexico’s energy minister, Luis Tellez, and Venezuelan Oil Minister Erwin Arrieta, according to the Saudi Press Agency.

Norway, a non-OPEC producer that in 1986 reduced output to help boost prices, said it isn’t ready to cut back its 3.3 million barrels of production, which is the largest in Western Europe.

OPEC is due to hold a committee meeting next Monday, which could become a full-scale OPEC meeting, with the power to cut quotas, if all 11 members of the group attend.

While traders don’t expect prices to surge back to $20 a barrel any time soon, production cuts could boost energy costs for many companies. The U.S. economy has maintained its robust growth due to falling energy prices that help businesses keep costs down, which also holds overall inflation in check.

Low energy prices are “quite a stimulant to the economy and an offsetting factor” to inflation, Kansas City Fed Bank President Thomas Hoenig said last week.

Falling energy costs contributed to a 0.1% decline in February’s producer price index, marking the fourth consecutive monthly decline.

To be sure, production cuts haven’t occurred yet. OPEC’s member nations have been unable for years to control their own output, and most non-OPEC countries, which account for two-thirds of world output, have shown little interest in cooperating with the producer group.

Several countries, including Venezuela, have invested heavily in new oil production. Venezuela, which now pumps about 3.45 million barrels a day, said last month it wants to double production to 6.3 million with $50 billion of investments by 2007.

“It would be surprising if we get cuts of 2 million barrels a day from OPEC and non-OPEC where they have an equal share of the cut,” Saucer said. “At the end of the day, supply cuts will have to come from OPEC, or we’ll see higher cost production close down.”