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Oil cartel cuts output but price still falls

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By Carola Hoyos in Vienna and Javier Blas in London

Published: October 25 2008 03:00 | Last updated: October 25 2008 03:00

Opec slashed production yesterday but oil prices continued to fall as growing concerns about the economic crisis sent crude to its lowest level in 16 months.

The cartel, which produces 40 per cent of the world’s oil, agreed to cut output by 1.5m barrels a day, or about 4.5 per cent, from November. Some members, including Venezuela and Iran, had wanted a cut of up to 2m b/d.

But the reduction, which in normal times should have led to a jump in prices, failed to stop the slide in the crude price. It fell yesterday to $62.65 a barrel, the lowest level since June 2007, on the strength of the US dollar and falling equity markets.

The prospect of further falls sent investors scrambling for protection, with the cost of insuring against a drop in the price to $50 before the end of the year almost tripling overnight. The price of put options at $50 for December – giving the holders the right to sell then at that price – jumped to $1.50 per contract, up 142 per cent from 62 cents on Thursday.

Edward Meir of MF Global in New York said: “The cartel is pushing against a hostile market environment towards energy, nurtured primarily by the increasingly dire economic backdrop.”

Some analysts warned that Opec’s decision would tighten the market in about two to three months, resulting in higher prices in early 2009. Paul Horsnell of Barclays Capital said the market could be slow to react to a production cut. “Prices did not bottom for three months after the last cycle of formal Opec cuts began in October 2006,” he said.”

Saudi Arabia at first resisted yesterday’s emergency meeting in Vienna, which was pushed by Algeria and Libya. Initially the group had widely divergent views on the depth of the cuts but as oil prices fell and put options indicated that traders were betting prices could slip to $50 a barrel, Opec members agreed they had to act decisively.

Rafael Ramirez, Venezuela’s energy minister and one of the most hawkish members, said Opec had to “avoid a price collapse like 1998”, when Asia’s financial crises pushed oil to below $10 a barrel.

Ali Naimi, Saudi oil minister, hinted that Opec could meet in the short-term, even before December’s planned meeting. “We’re prepared to meet more often to stabilise the market,” he said. The total reduction could amount to as much as 1.8mb/d, or 6 per cent, as members first cut the 300,000b/d they are producing in excess of Opec’s ceiling and then implement the 1.5m agreement.

Washington, London and the International Energy Agency, the western countries’ energy watchdog, said Opec’s actions could aggravate the economic crisis. But Opec ministers dismissed the criticism.

“Oil prices have witnessed a dramatic collapse – unprecedented in speed and magnitude,” the group said in a communiqué. The cartel said its action was a way of contributing to investment in the oil sector, warning that falling prices “may put at jeopardy many existing oil projects and lead to the cancellation or delays of others, possibly resulting in a medium-term supply shortage”.

Beyond yesterday’s fall in prices, the key signal for prices in the medium-term will be Opec’s adherence to its agreement. Many traders doubt that it will implement the cuts fully, noting that historically the group has managed about a 60 per cent adherence rate. But Chakib Khelil, Algeria’s energy minister and Opec’s president, said there was “no other choice” and that it was having trouble selling its oil as buyers stayed away or could not secure letters of credit.

Many of the cuts will also hit energy groups working in Opec countries, including ExxonMobil and Chevron of the US, and Total, Royal Dutch Shell, Eni and Statoil of Europe.

Saudi Arabia, which produces its oil without the help of international energy groups, has already quietly cut its production. Other countries will shoulder less of a burden because they produce fewer barrels. But their adherence will be a key indicator of whether Opec is able to act cohesively as it embarks on its most critical but also most difficult challenge in more than a decade.

Brown calls back invitations

Gordon Brown, the prime minister, is downgrading plans for an international oil summit and withdrawing invitations to George W. Bush, Hugo Chávez of Venezuela and Muammer Gaddafi of Libya after a collapse in oil prices sapped world leaders’ interest.

The move to “recalibrate” the summit to ministerial level comes after British ambassadors spent months selling the importance of the December conference, which Mr Brown called to address “the most worrying situation in the world”.

Downing Street said the plans had been overtaken by the US offering to host heads of state from the G20 countries for a summit to discuss the global financial crisis next month, even though this gathering would exclude some big oil producers. “The priority for the heads of government must be to address global economic instability at the G20, including oil prices,” said one official.

Since June, when Mr Brown said “the demand for oil is exceeding the supply of oil, not just now but in the medium to long-term future”, the price of oil has halved. Ed Miliband, energy secretary, is expected to host fellow ministers at a December summit.

RELATED FT ARTICLE

Oil cartel sees future supply threat

By Carola Hoyos in Vienna and Javier Blas in London

Published: October 25 2008 03:00 | Last updated: October 25 2008 03:00

The Opec cartel gave warning yesterday that the collapse in crude prices had already put some big oil projects in jeopardy – hinting that future supplies were in danger. It raised the alarm as it slashed production in an effort to put a floor on plummeting prices.

The oil producers’ cartel reduced its official quota level by 1.5m barrels a day from November 1. But prices shrugged off the news and continued to fall, reflecting the severity of the economic crisis and the speed with which it was spreading to important oil-demand growth areas such as China.

Opec said in its communiqué that oil prices had witnessed a dramatic collapse, “unprecedented in speed and magnitude”, to just above $60 a barrel from July’s record high of almost $150. The falling trend “may put at jeopardy many existing oil projects and lead to the cancellation or delays of others, possibly resulting in a medium-term supply shortage”.

Opec’s warning was made as some small oil companies are starting to delay or even cancel some of their most expensive projects.

Analysts said today’s low prices could sow the seeds of future record highs. They said the recovery of the global economy, in one to two years, could coincide with lower-than-expected supply growth, owing to a combination of the current lack of credit for new oilfields and project cancellations.

Ali Naimi, Saudi Arabia’s oil minister, said the decision to cut production “was straightforward. . . Opec will do whatever is necessary to balance oil markets.”

At first, Saudi Arabia resisted yesterday’s emergency meeting in Vienna, which was pushed by Algeria and Libya. Initially, the cartel had widely divergent views on the depth of the cuts but, as oil prices fell, and put-options indicated that traders were betting prices could slip to $50 a barrel, Opec members agreed they had to act decisively.

Rafael Ramírez, Venezuela’s energy minister and one of the cartel’s most hawkish members, said Opec had to “avoid a price collapse like 1998”, when Asia’s financial meltdown pushed oil to below $10 a barrel.

Yesterday, prices fell to a 16-month low of $62.55 a barrel. Edward Meir, of MF Global in New York, said: “The cartel is pushing against a hostile market environment towards energy – nurtured primarily by the increasing dire economic backdrop.”

Opec’s total reduction could, at least in theory, amount to as much as 1.8m barrels a day, or 6 per cent, as members first cut the 300,000 b/d they are producing in excess of Opec’s ceiling and then implement the 1.5m agreement.

Ministers dismissed criticism that their actions could aggravate the global economic crisis.

Many traders doubt that Opec will fully implement the cuts, noting that, historically, the group has managed about a 60 per cent adherence rate.

But Chakib Khelil, Algeria’s energy minister and Opec’s president, insisted the group had “no other choice” and that it was having trouble selling its oil, as buyers stayed away or were unable to secure letters of credit.

Many of the cutbacks will hit international energy groups working in Opec countries. ExxonMobil and Chevron of the US, and Total and Statoil of Europe, are expected to have to reduce the amount they pump from Angola, which has agreed a 99,000 b/d cut in its quota, while Royal Dutch Shell, Total and Eni of Italy will be most affected by the 113,000 b/d reduction in Nigeria’s quota.

Saudi Arabia, which produces its oil without the help of international energy groups, has already quietly cut its production. The kingdom’s output reached 9.7m b/d in August as world leaders, including President George W. Bush of the US and Gordon Brown, the British prime minister, called on Opec to pump more oil to damp prices, which had hit a $147-a-barrel record in mid-July.

The Saudis are now believed to be producing 9.1m b/d. Under Opec’s agreement, Riyadh will have to cut another 200,000 barrels to reach its quota level and then reduce its production by a further 466,000 b/d from November 1.

Other countries will shoulder less of a burden because they produce fewer barrels of oil. But their adherence will be a key indicator of whether Opec is able to act cohesively as it embarks on its most critical – but also most difficult – challenge in more than a decade.

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