OPEC Heayweights Back Production Cut

Saudi Arabia, the leading oil-producing nation, wants the Organization of Petroleum Exporting Countries to cut oil production by 1 million barrels per day in April. Fears of an oversupplied market, seasonal drop in demand, and US stock-building have motivated Saudi Arabia's position. Venezuela, Algeria, Libya and other members of OPEC also support the production cut. Kuwait, however, wants to delay the cut and Iraq suggests that OPEC reconvene in May to assess the effect, if any, the cut will have had on the market. Non-OPEC member Mexico, though asked by Saudia Arabia to support the cut, will wait to see what OPEC does. Mexico is a key oil provider for the US and typically competes with Saudi Arabia. The Bush administration, fearing high oil prices might become a campaign issue, has pressed OPEC countries to keep supplies flowing. OPEC may reconsider the production cut if prices remain high, perhaps above $30 per barrel. Hedge funds, anticipating a drop in prices, have moved out of long positions. –YaleGlobal

OPEC Heayweights Back Production Cut

Carola Hoyos
Tuesday, March 30, 2004

Leading oil producer Saudi Arabia and Venezuela, another heavyweight in the Organisation of Petroleum Exporting Countries, lined up on Tuesday to support the implementation of 1m barrels per day of production cuts in April.

Their oil ministers were joined by peers from Algeria and Libya, suggesting the weight of opinion is behind the surprise cut agreed in February due to fears that seasonal demand falls, combined with US stockbuilding, could create a price collapse in the second quarter.

Kuwait believes the cut should be delayed. Although prices are currently at nominal levels not seen for a decade, the weakness of the dollar in which oil is priced means oil producer treasuries are reaping only part of the benefit.

An Iraqi proposal that Opec ministers should reconvene in May to assess the market might provide room for a compromise, with the cut going ahead but being re-evaluated after only a few weeks.

Saudi Arabia confirmed on Tuesday that it would push the Organisation of Petroleum Exporting Countries to cut output despite some members' opposition and high oil prices.

Ali Naimi, Saudia Arabia's energy minister, late on Monday told Felipe Calderón, his Mexican counterpart, that the market looked over-supplied and that the kingdom feared a serious price drop in the coming months if the oil cartel did not act immediately, people close to the meeting said.

People present at the meeting said that they interpreted Mr Naimi's position as being opposed to the idea of postponing the 1m barrel a day reduction in Opec's quota decided in Algiers last month. But Opec on Tuesday will negotiate the details of its decision and a final announcement is expected on Wednesday.

Hedge funds have already begun to liquidate their long positions.

Mr Naimi said that oil prices had fallen and that oil inventories in the US had risen since the meeting in Algiers.

Saudi Arabia is by far Opec's most influential member and its position is likely to be unwelcome in Washington. Fearing that high petrol prices this summer could become a political liability ahead of the presidential elections in November, the administration of President George W. Bush has begun pressing producing countries not to reduce supplies.

Also at the meeting, Saudi Arabia asked Mexico to co-operate with Opec but Mexico said it wanted Opec to act first.

"Mexico's position is they [Opec] have said a lot, but implemented little," said a person with knowledge of the meeting.

He added that Mexico, which is not a member of Opec, had co-operated with Opec in the past five years, though not on the last two occasions the cartel said it would cut output.

Mexico's involvement is important to Saudi Arabia and Venezuela. Both compete with it to supply oil to the US, the world's largest consumer, and do not want to lose market share.

Saudi Arabia and other Opec members fear a drop in demand for heating oil in the west as spring progresses.

Saudi Arabia, the world's biggest exporter, is trying to keep inventories held by companies in consuming countries as low as possible.

It is a policy that in the past year has narrowed the gap between supply and demand, strengthening Opec's grip on the market.

Angola, Oman and Norway, other key suppliers that have in the past co-operated with Opec, are also unlikely to heed the cartel's call to cut supplies this time.

At its February meeting, in Algiers, Opec, which supplies about 38 per cent of the world's oil, decided to reduce its quota output by 1m barrels a day, to 23.5m b/d as of April 1, but said it could reconsider the issue at tomorrow's meeting if prices stayed high.

The cartel also promised said it would to cut 1.5m b/d of oil it was supplying above its quota, but did not fully deliver as prices remained well above $30.

Brent futures were slow to react on Tuesday, but by mid morning were up 21 cents to $31.95 a barrel, while Nymex crude was up 35 cents in pre-market electronic trade to $35.80 a barrel.

© Copyright The Financial Times Ltd 2004