Opec cuts production by record 2.2m bpd

Output reduction outstrips expectations as organisation battles plummeting prices amid crisis but fears future supply shortage.

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ORAN, Algeria // Opec agreed yesterday to cut a record 2.2 million barrels per day (bpd) from its oil output in response to the deepest collapse in demand in a quarter of a century. The cut was even larger than expected by analysts, underlining concerns among exporters over a $100 per barrel drop in the price of oil in the past five months.

But oil futures on the New York Mercantile Exchange fell after the decision, by $1.50 per barrel to $42.08, after a weekly report showed that US inventories continued to swell. "I hope we surprised you. If not, we have to do something about it," said Chakib Khelil, the president of Opec and Algeria's oil minister, who hosted yesterday's meeting. The deteriorating worldwide economy has undermined demand for oil, and fuel inventories are bulging across the industrialised world. Consumption has also fallen from the effects of high prices over the summer, when futures reached a record above $147 a barrel.

Prices have plunged by two-thirds since, and analysts say the oil market is now under the sway of world financial turmoil. "It's no surprise they're putting through these massive cuts, but I still think prices will continue to go lower into next year," said Michael Lewis, the head of commodity research at Deutsche Bank. "Historically Opec's had to remove around five million barrels from the market in previous slumps, and they're facing bigger problems now than they have done before."

Opec's output reductions announced since the summer now total 4.2 million bpd, equivalent to 14 per cent of its peak supply. Mr Khelil said oil producers were suffering the effects of the wild price swings, caused in part by the rise and fall of the Wall Street banks, and were concerned that a sustained drop in price would slow investment in new production capacity and lead to a shortage. "Hard decisions have to be made," he said. "This is bad news for the industry and for producers and consumers alike. If this situation continues for too long, it will mean more supply shortages in the future."

Dalton Garis, an associate professor of economics and market behaviour at the Petroleum Institute in Abu Dhabi, said markets were continuing to undervalue oil because traders had little confidence that the trend of falling demand could be reversed. "Most economists would probably agree that it should be selling at something like $60 a barrel," he said. "What people are doing now, it's really the present informing the future."

Prices have fallen so far that even exporters outside Opec have begun to tighten the taps. Russia, the world's second-largest oil producer, has cut production by 350,000 bpd, said the country's deputy premier, Igor Sechin. However, analysts were sceptical that Russia's move was anything more than symbolic, since its production is already in decline. Another question mark over yesterday's decision is compliance by Opec itself. Many analysts question whether its 13 members can implement the cut faster than the economic crisis saps demand.

Opec expects the world's appetite for crude to contract this year for the first time in 25 years, and continue falling in 2009. cstanton@thenational.ae