OPEC to Cut Output 5%; Gas Prices Unlikely to Rise Much
OPEC said Wednesday that it will trim its official crude oil production 5% next month, a move likely to anger the cartel’s biggest customers but one that won’t necessarily hurt consumers at the gasoline pump.
The cuts, to take effect Feb. 1, are aimed at keeping crude prices firm ahead of an expected slowdown in U.S. economic growth and diminishing seasonal demand for refined products such as heating oil. Delegates of the Organization of Petroleum Exporting Countries approved details of the cuts during a formal meeting at the cartel’s headquarters in Vienna.
The 1.5-million-barrel-a-day decrease in production, OPEC’s first cutback in two years, is sure to disappoint the governments of many oil-importing nations. The United States and the European Union had lobbied hard for OPEC to keep crude flowing at current levels, given their fears of U.S. economic fragility and a possible global recession.
OPEC ministers justified their action as an effort to stabilize volatile crude prices, and they argued that their economies would suffer if prices plunged. They played down the potential pain their decision might inflict on importing countries.
“This is a very prudent decision. We don’t want to hurt consumers, and we want to protect the interests of producers,” OPEC Secretary-General Ali Rodriguez told a news conference.
Qatari Oil Minister Abdullah bin Hamad al Attiyah said, “The United States’ economy is very important for us, as our economy also should be important to them.”
Some OPEC members suggested that the group might reduce output again in March, when it meets again to assess market conditions. Iranian Oil Minister Bijan Namdar Zangeneh expressed support for an additional cut of 500,000 barrels at that time.
OPEC supplies almost two-fifths of the world’s crude. The group is eager to avoid repeating its mistake of December 1997, when it decided to boost output shortly before the Asian financial crisis throttled demand. Prices bottomed out a year later around $10 a barrel.
Now OPEC members fear that prices could collapse again if demand softens, and analysts had said a decision to reduce output was a foregone conclusion.
Typically, a cut in oil output would raise crude oil prices and probably gasoline prices at the pump. But some analysts said the latest cut might not make much of a difference for individual consumers.
“The cut is not going to have a negative impact on consumers,” said Leo Drollas, chief economist of the London-based Center for Global Energy Studies. “It’s not too bad. It could have been worse.”
Peter Gignoux, head of the petroleum desk at Salomon Smith Barney in London, said OPEC’s widely anticipated decision would not unsettle oil markets.
“The markets have already had so much time to prepare for this decrease that it’s absolutely priced in,” he said.
Oil prices have surged in recent weeks, rising above $30 a barrel last week in the United States, a four-week high.
News of OPEC’s decision sent prices sharply lower Wednesday, however. February contracts of U.S. benchmark light sweet crude fell 69 cents to $29.60 per barrel on the New York Mercantile Exchange. North Sea Brent, the European benchmark crude, closed 73 cents lower at $24.79 per barrel on the International Petroleum Exchange in London.
The biggest wild card for consumers and OPEC alike is Iraq, an important cartel member, which continues to withhold the bulk of its crude from the market: It has slashed its crude exports by about 1.7 million barrels a day, shipping just 671,000 barrels a day last week, according to the United Nations.
Iraq is embroiled in a pricing dispute with the United Nations, which regulates all Iraqi exports. Iraq has not participated in OPEC’s production agreements since the 1991 Gulf War, and OPEC members said they aimed to trim output regardless of what Iraq does.
However, OPEC officials suggested that group members would make up for any shortfall created by an Iraqi withdrawal from the market, thereby helping to contain any jump in prices.
