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Financial Times: Opec vows to defend minimum $60 for oil

By Carola Hoyos in Doha
Published: October 20 2006 03:00 | Last updated: October 20 2006 03:00

The Organisation of Petroleum Exporting Countries, the cartel that controls 40 per cent of the world’s supplies, yesterday declared its resolve to defend $60 as a new minimum international oil price. Saudi Arabia, the world’s biggest oil producer, backed an immediate Opec output cut of 1m barrels a day and warned that a second reduction would be considered in December.

The strong message from the world’s most influential oil producer yesterday pushed up oil prices even before Opec had agreed a final declaration and overcome the divisive issue of how to share the burden of cutting production and revenue. Nymex and Brent crude futures, the world’s two international benchmarks, both jumped almost a dollar in the moments after Ali Naimi, Saudi Arabia’s oil minister, made the kingdom’s position clear.

Mr Naimi told reporters as he arrived in Doha: “The price is determined by the market. What we try to do is to make the market balanced. Today there is a dis-equilibrium between supply and demand. Today we are trying to get the market to the normal equilibrium and the price will take care of itself.

“The possibility of another cut is there,” he added.

Vera de Ladoucette, analyst at Cambridge Energy Research Associates, the consultancy, said: “Usually when the decision is taken it has already been priced into the market. But sometimes Opec can surprise.”

But oil producers’ new-found resolve could yet backfire as high oil prices fuel inflation and further damage economic growth, which has already slowed in the US, the cartel’s main client.

Producers have watched with concern as crude oil inventories in consuming countries have grown, indicating that the market was oversupplied. US inventories of crude oil in the past week rose by 5.1m barrels a day to 8 per cent above year-ago levels, according to data published on Wednesday by the Energy Information Administration, the statistical arm of the US Department of Energy.

Despite its concerns over prices, Saudi Arabia does not want to return to being the world’s sole swing producer, a role it played from 1980-86, cutting supply as oil prices fell. Opec will, therefore, need to share the cuts and the subsequent reduction in revenue.

Exactly how the 11-member group will do this has been a point of contention for the past two weeks and is likely to become clear only after sunset in Doha when ministers break their Ramadan fast and meet to discuss the details of their plan.

Ms de Ladoucette said a robust communiqué describing how members would share the cuts would be critical. As divisions within Opec have appeared over the past two weeks, traders have begun to doubt the cartel’s ability to act. They will carefully assess whether the group’s decision in Doha is credible and the cuts will actually be adhered to by at least the key members.

Opec’s ambition to cut its supplies also comes at a cost, particularly for countries such as Saudi Arabia that have heavily invested their petrodollars into building their oil sectors.

Libya, the United Arab Emirates, Nigeria and Algeria have courted international energy groups to help them boost their production. Venezuela, Indonesia, Qatar and Iran also have international oil companies working in their fields. These members of Opec will now have to tell the likes of Europe’s Royal Dutch Shell, BP, Total, Repsol and the US’s ExxonMobil and ChevronTexaco to reduce the output from their fields and forego revenue. How much each company will have to sacrifice will depend on how Opec splits the burden of the cut among its member states.

But the news is not all bad for the companies because they would benefit from any boost in prices that followed Opec’s decision.

Copyright The Financial Times Limited 2006

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