New York Times: Venezuela and Nigeria, Both OPEC Members, Say They Will Cut Their Oil Production

By JAD MOUAWAD
Published: September 30, 2006

Some members of OPEC are getting really nervous about oil at $60 a barrel.

Two of the oil cartel’s 11 members, Nigeria and Venezuela, said yesterday that they would make voluntary cuts in their production in response to oil prices that have fallen nearly 20 percent from their peak two months ago.

The modest move, which amounts to less than 200,000 barrels a day, comes after days of mixed signals from some OPEC officials who have been increasingly concerned about the rapid drop in prices.

Nigeria’s oil minister, Edmund Daukoru, who is the OPEC president this year, recently said the price of oil was “very low.” Both countries, traditional price hawks within the Organization of the Petroleum Exporting Countries, said their cut was part of an informal deal agreed to at OPEC’s last meeting this month to pare output if prices declined.

Yesterday’s announcement was initially shrugged off by oil traders who say there was still plenty of oil supplies on the market. But the confusion around OPEC’s position helped push up the price of crude oil on the New York Mercantile Exchange. Oil futures for November delivery pared initial losses and closed at $62.90 a barrel, up 14 cents.

Since they last met in Vienna, OPEC representatives have become anxious as they watch crude oil futures decline rapidly from a midsummer high of $77.03 a barrel.

Mr. Daukoru has been in contact with other OPEC ministers to discuss falling oil prices, which briefly dropped below $60 a barrel in intraday trading for the first time in six months on Monday. But OPEC denied there had been a shift in policy.

One delegate from a Persian Gulf country, who spoke on the condition of anonymity because he was not entitled to talk about his country’s policy publicly, had a calmer view.

“We are not currently concerned,” he said. “The prices are currently manageable and fair. We’re not overly alarmed by the prices. It’s the market working.”

Demand for crude oil typically declines after Labor Day, and it is not unusual for oil prices to drop once the summer driving season is over. Consumption tends to pick up again with the first winter cold.

“We are not going to push extra oil in the market or force it down our customers’ throats; we just respond to demand,” the delegate said.

Still, despite assurances from Saudi Arabia and others that they would keep markets amply supplied with oil, the contradictory statements from senior OPEC representatives have raised doubts about the oil cartel’s strategy.

Whether Nigeria and Venezuela actually reduce their output or not, the mixed messages have at least succeeded in one way: oil traders have been persuaded that OPEC will step in to defend prices, and, therefore, the recent price decline has slowed.

OPEC’s acting secretary general, Mohammed Barkindo, who is also a senior Nigerian official, told the energy publication Platts that he had met with Saudi Arabia’s oil minister this week in Riyadh and that Saudi Arabia was already cutting its production as part of the informal agreement. Saudi Arabia has not commented on any change in policy.

It will take a much larger drop in prices for OPEC to step in formally with a cartelwide production cut. Saudi Arabia, OPEC’s largest and most influential member, is apparently comfortable seeing crude oil fall to around $55 a barrel. Further declines, however, might provoke action by OPEC.

“While apparently fanciful, reports of an imminent output cut reflect two hard facts: stocks are building faster than expected and several producers have an incredibly low pain threshold when it comes to price drops,” Antoine Halff, an energy analyst with Fimat, wrote in a note yesterday. “However, more price declines will likely be needed before OPEC producers decide on any coordinated move.”

Venezuela, which pumps about 2.5 million barrels a day, said it would cut its daily output by 50,000 barrels, starting tomorrow. Nigeria said it would trim its exports by 5 percent at the same date, amounting to a reduction of about 120,000 barrels a day. Nigeria produces about 3.8 million barrels a day. It is notable that these two countries are taking the self-appointed role of managing the market since neither is currently meeting its OPEC production quota.

Nigeria’s production, for example, is hundreds of thousands of barrels short of its peak because of social unrest in the Niger Delta, while Venezuela has experienced lower output for some time.

“They are trying to influence the psychology of the market,” said Larry Goldstein, an oil analyst and the president of the Petroleum Industry Research Foundation in New York. “Although they are reacting to the reduction in demand, they are trying to convince the market that they are actually anticipating it by making cuts ahead of the market. But they are simply reacting to it, which is how markets should operate.”

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