LONDON (AFX) – OPEC’s surprise decision last week to cut output quotas raises questions over the credibility of the cartel and represents a slap in the face for oil consuming countries hoping for low oil prices in order to boost economic growth, analysts said.
The Organisation of Petroleum Exporting Countries (OPEC) will reduce its output ceiling by 900,000 barrels per day from Nov 1, according to an official statement issued after a ministerial meeting in Vienna Sep 24.
The decision to cut output came against a clear consensus expectation that any reduction in quotas would be put off until later in the year, analysts said.
Energy analyst John Cusack of US securities firm Fahnestock and Co said OPEC’s decision to cut quotas was a slap in the face for oil consuming nations.
“It’s an odd move and represents a bit of a setback, given that people had been expecting OPEC to at least wait until December before making any changes,” he said.
The move by OPEC has to some extent reversed a month-long downturn in prices, an outcome which will do little to boost the economies of oil consuming countries still struggling to climb out of an economic slump, analysts said.
The extent to which the decision surprised the markets was illustrated by the price reaction in crude futures, which surged in London and New York.
Brent crude, used to price two thirds of the world’s internationally traded oil, surged over a dollar within minutes of OPEC’s announced cuts.
New York’s light sweet crude futures made similar gains following the announcement.
“While we were all expecting a fastball, OPEC threw us a curve by reportedly developing a plan to cut output by 900,000 b/d effective Nov 1,” wrote Prudential Financial analyst Jim Ritterbusch in a note to clients.
Output cuts had been expected, but not until later this year or in early 2004, when Iraq’s war-hit exports are expected to be more substantial, analysts said.
“The decision appears to be anticipatory as the cartel is looking ahead to what could be a weak pricing environment during the first half of next year,” said Mr Ritterbusch.
OPEC generally adjusts output to keep prices within a US$22-28 a barrel range.
The announcement to cut output was particularly surprising given that prices are currently trading comfortably within this price band, analysts said.
“This action brings into question the credibility of the cartel in view of the decision to cut output with the OPEC price basket in the middle of the cartel’s targeted range and with global supply coverage still at a low level,” said Mr Ritterbusch.
OPEC’s reference basket of seven crudes stood at US$24.82 a barrel as of Sept 19.
The 11-member cartel had been widely expected to maintain its existing 25.4 million barrel per day output ceiling through the fourth quarter of 2003, amid calls from some consuming countries to actually raise output in order to rebuild low stocks.
Merrill Lynch analyst Steve Pfifer said: “The quota cut shows that OPEC is being proactive and erring on the side of putting too few barrels on the market, rather than risk oversupply.”
He said background factors also remain bullish: “The supply cut will occur while inventories remain well below normal, Iraqi production is far short of pre-war levels and oil markets are in the seasonally strong winter demand period.”
Mr Cusack of Fahnestock and Co said: “It seems they are overreacting to Iraq coming back onstream.”
Iraq’s output has made steady gains since the US-led campaign to remove leader Saddam Hussein, despite repeated acts of sabotage by suspected Saddam loyalists.
Iraq’s interim Oil Minister Ibrahim Bahr al-Ulum said Iraqi oil exports were planned to increase to 1.8 million b/d by next March, doubling the current 900,000 b/d level.
Iraq is a member of OPEC but not part of its production quota system.
Other OPEC ministers today defended the decision to reduce the quota ceiling.
“We will have a very difficult situation at the start of next year,” due to overproduction and high inventories, which explains the need to cut production to keep prices in OPEC’s target band, said Algerian oil minister Chakib Khelil.
In the opening address to the conference, OPEC President Abdullah bin Hamad Al Attiyah said: “Prices have been supported in the summer by the uncertainty about developments in Iraq, disruptions in some producing countries, low stocks and high natural gas prices in the US.”
“This has been in spite of the fact that there has been no shortage in the physical market for crude oil, as enquiries among our customers have confirmed.
“The recent weakening of the price has coincided with the end of the summer driving season. Nevertheless, the situation in the market remains relatively stable,” he added.
Mr Al-Attiyah closed his address by reminding non-OPEC countries of the importance of cooperation in maintaining stable supplies and prices.
“Low growth rates and increasing unemployment will not help demand. Forecast increases in non-OPEC output will provide an added element of pressure on the call on OPEC oil.
“This is why we are constantly reminding fellow producers outside our Organisation of the need for consultations and coordination, in the interests of price stability at reasonable levels.
“OPEC cannot act alone. We have already seen our market share suffer in recent years, as we have sought to manage our production levels, to the benefit of all producers,” he said.