OPEC Production Cuts - Saudi Arabia

Home | Site Map

Home > Articles > 2008 > Special Reports > December 18, 2008

Oil on a Slide: OPEC Acts, Again

Editor's Note:

Six months ago SUSRIS reported on Saudi Arabia's call for producers and consumers to talk about global energy prices as crude soared on its way to a mid-summer high of $147 a barrel. One hundred dollars later, in the opposite direction, the OPEC producers are scrambling in search of a basement for the price of crude. This week OPEC leaders in Algeria for its 151st Extraordinary Meeting pledged to cut 2.2 million barrels per day (mbpd) bringing the three month total of cuts to 4.2 mpbd, a 12 percent slide in crude output from the OPEC-11 production level of 29.045 mpbd. The cuts are set to take effect January 1, 2009.

The post meeting communique noted that members were "strongly emphasizing their firm commitment to ensuring that their production is reduced by the individually agreed amounts." Moreover, they commited to providing an "economic and regular supply to consuming nations" and they sought to stabilize the market in pursuit of "fair and equitable levels.. for producers and consumers alike." The next "Ordinary Meeting" is set for March 15, 2009 in Vienna.

This special report provides an overview of the actions taken at the OPEC meeting and their consequences through the lens of an Arab News report as well as several other article excerpts and related items.

OPEC Press Release - 151st (Extraordinary) Meeting of the OPEC Conference

OPEC cuts record 2.2m barrels a day
Arab News

The Organization of the Petroleum Exporting Countries (OPEC) yesterday agreed to slash 2.2 million barrels from its daily production � its single largest cut ever � while bloc outsiders Russia and Azerbaijan announced their own cutbacks of hundreds of thousands of barrels from the market.

�I hope we surprised you,� OPEC President Chekib Khelil said when asked whether the size of the cut would shock moribund oil markets into an upward trend. �If you�re not surprised we need to do something about it.� And yet markets weren�t impressed.

Crude oil prices sank to $40.20 after the announcement, a level not seen since the summer of 2004 and a clear sign investors are more worried that the world is heading for a long and painful recession in which energy use will continue to erode.

In just five months, crude has given up all of the price gains made over the past four years.

Making matters worse for OPEC, Moscow distanced itself from direct ties with the 13-nation producers� group, further dampening OPEC hopes of coordinated production cuts that might put a floor under crude prices. OPEC said oil ministers of the 11 nations under the group�s quota system agreed to take 4.2 million barrels a day off the market, but that includes two previously announced cuts that totaled 2 million barrels. That leaves the new output reduction announced yesterday at 2.2 million barrels, effective Jan. 1.

Still, even the record cut was unable to counterbalance consumers� concerns about the dismal world economy.

In the US, the world�s largest crude consumer, the Federal Reserve�s decision to slash its target interest rate to nearly zero buoyed global stock markets Tuesday and early yesterday.

But the news on the US economy is expected to get worse before it gets better. Businesses, which have already cut nearly 2 million jobs since January, keep laying off workers in the face of slumping demand.

The government reported Tuesday before the Fed rate announcement that home builders slashed production in November by 18.9 percent, the biggest drop in nearly a quarter century. That pushed activity down to a record low annual rate of 625,000 units as the woes in the property market, where the current economic troubles began, showed no signs of abating.

Focusing on the shrinking oil market, OPEC noted in its statement that �crude volumes entering the market remain well in excess of actual demand.� �Moreover, the impact of the grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices,� it said. The group said �if unchecked, prices could fall to levels which would place in jeopardy the investments required to guarantee adequate energy supplies in the medium to long term.�

In addition to signaling that a major cut was in the offing in the days leading up to the Oran conference, OPEC ministers had expressed hope that Russia � the No. 2 producer after Saudi Arabia � would join in a significant cutback that would bolster prices.

Such support would be significant. Non-OPEC members Mexico, Norway and Russia last slashed production in the late 1990s, at a time oil was selling for about $10 a barrel.

But although Russian Deputy Premier Igor Sechin and Azeri Energy Minister Natik Aliev announced cutbacks of a total of more than 600,000 barrels a day, their commitments appeared largely symbolic.

The Russians indicated their reductions had already been implemented in November, while Azerbaijan�s output had already been reduced by about a third due to production problems earlier this year.

Among those hoping for Moscow�s support was Saudi Arabia.

�We also hope that other producers who are not in OPEC will chip in for the purpose of bringing stability to the market,� said Minister of Petroleum and Mineral Resources Ali Al-Naimi said, in a nod to Russia.

Sechin, in comments to The Associated Press, said �Russian oil companies have already made a decision to cut deliveries to the market ... approximately equivalent to 350,000 barrels per day.� But he specified that his country�s cuts had already been enacted ahead of the OPEC meeting. Sechin did hold out the possibility of further reductions, saying Russia was ready to pare another 320,000 barrels a day �if we see the continuation of the current level of prices on the world oil markets.�

Source: Arab News

More Reporting:

OPEC slashes production, but oil markets shrug - Houston Chronicle
"So much for Saudi Oil minister Ali al-Naimi's vision of $75 a barrel as a fair price for crude. Amid ever-worsening economic news, rising stockpiles and the federal government's forecast that U.S. oil consumption will be virtually flat for 20 years, oil markets on Wednesday shrugged off OPEC's largest-ever single production cut of 2.2 million barrels a day.. ..the U.S. Energy Information Administration said inventories rose 525,000 barrels to 321.3 million barrels last week, the latest in an overall 11 percent hike in stockpiles in the last three months. "The market is saying to OPEC, 'You really didn't do your job. If you want prices to go higher, we need a bigger cut in supply,' " said Addison Armstrong, chief market analyst for Tradition Energy in Stamford, Conn. "They set the stage for an oil price drop to $30."   [more]

OPEC Agrees to Another Cut in Production - NY Times
"The OPEC cartel agreed on Wednesday to reduce production by 2.2 million barrels a day, the group�s largest cut ever, in an effort to put a floor on falling oil prices. It is the third time producers have agreed to reduce their output in three months. Since September, members of the Organization of the Petroleum Exporting Countries have pledged cuts totaling 4.2 million barrels a day, or nearly 12 percent of their capacity, a record in such a short time.."    [more]

Oil, ignoring record OPEC cut, hovers below $41 - Forbes
"..Crude oil hovered below $41 a barrel on Thursday, having touched the lowest price since July 2004, after OPEC announced its biggest output cut ever and China slashed domestic fuel prices for the first time in two years. Oil is $107 off its July peak, shedding value as a global recession cuts into fuel demand. The U.S. January light crude contract sank to $39.19 on Thursday and was then trading up 65 cents at $40.71 a barrel.."   [more]

OPEC Oil Export Revenues - Fact Sheet - EIA
Based on projections from the EIA November 2008 Short Term Energy Outlook (STEO), members of the Organization of the Petroleum Exporting Countries (OPEC) could earn $979 billion of net oil export revenues in 2008, and $595 billion in 2009. Through October, OPEC has earned an estimated $884 billion in net oil export earnings in 2008. Last year, OPEC earned $671 billion in net oil export revenues, a 10 percent increase from 2006. Saudi Arabia earned the largest share of these earnings, $194 billion, representing 29 percent of total OPEC revenues. On a per-capita basis, OPEC net oil export earning reached $1,137, a 8 percent increase from 2006.     [more]

Related Material:

U.S.-Saudi Relations and Global Energy Security Conference:

Saudi-US Relations Information Service
eMail: [email protected]
Web: http://www.Saudi-US-Relations.org
� 2008
Users of the The Saudi-US Relations Information Service are assumed to have read and agreed to our terms and conditions and legal disclaimer contained on the SUSRIS.org Web site.