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OPEC: Is anything sound in output reduction?

The Organization of Petroleum Exporting Countries took a surprising decision to cut its oil output on September, 24. The decision was a surprise to most analysts and oil producers

The Organization of Petroleum Exporting Countries took a surprising decision to cut its oil output on September, 24. The decision was a surprise to most analysts but it only showed that OPEC is ready to defend its price target band of $22 to $28 per barrel. OPEC surprised all observers when it announced a cut of its oil production by 900?000 barrels per day to make room for increasing crude exports from Iraq.
The reason of OPEC agreement to cut production by 3.5 per cent from the 1st of November is seeking to prevent supplies from swelling as Iraqi production recovers and Russian output rises and also because of world oil demand stagnating, so to keep world prices steady and high. The move pushed up oil prices by more than 10 per cent on concern of shortages during the northern winter, but prices have been weakening for the past two weeks as speculators cashed in their gains. OPEC wants to prevent oil from slipping below $20, let alone collapsing back into the single-digit prices seen in 1998.
"Stocks are increasing, and in the second quarter we saw a sharp fall in prices coming," said OPEC Secretary-General Ali Rodriguez. "We wanted to maintain the stability of the market and, of course, of prices."
Although the OPEC agreed to cut its output to 24.5 million bpd to keep up prices, it considers an index of its crudes should remain above $28 for 20 consecutive working days.This decision have already had many consequences for the world's economy, U.S. energy security, OPEC and non-OPEC countries relationships an so on.
After OPEC decision many rumors and charges in promoting the high prices by OPEC, but OPEC assured that it was because of the strong demand, and that price level was temporary.


,Russia and the Soviet successor states can easily continue to increase oil output at this rate for years to come. The victims of that increase, in all likelihood, will be Saudi Arabia, Kuwait, and other oil producers with state monopoly companies that disallow foreign investment. The only oil not threatened by Russia's rise is the petroleum developed by international companies outside of the key OPEC countries of the Middle East.
The Russian increases have come as a surprise, especially for OPEC. As recently as 1996, oil output from the post-Soviet states amounted to barely 7 mln bpd. Many people forgot that Moscow's state-owned enterprises once produced more than 12.5mln bpd before the Soviet collapse -- the largest amount of oil ever produced by a single country, representing 1/5 of global production. That sum is one-third more than Saudi Arabia's peak share at the end of 2000.
The United States and the European Union had urged OPEC to consider maintaining output or at least make only a slight reduction, and in practice they may have less to fear than originally thought. Experts said deliveries were likely to subside by closer to 1 million bpd than the 1.5 million official cut as some countries were now having trouble meeting their quotas. Higher oil prices could lead to inflation in oil-consuming countries, which is already fueling fears of recession in the United States, which sent Energy Secretary Bill Richardson on a whirlwind tour of the Persian Gulf countries to argue the U.S. case to OPEC ministers.


,Oil prices surged after OPEC agreed a surprise cut in oil output ahead of peak winter demand.
The United States and the European Union had urged OPEC to consider maintaining output, or at least make only a slight reduction, and in practice they may have less to fear than originally thought. Experts said deliveries were likely to subside by closer to 1 million bpd than the 1.5 million official cut as some countries were now having trouble meeting their quotas. Higher oil prices could lead to inflation in oil-consuming countries.
For the first time in a month, crude futures surpassed the $30 mark on the New York Mercantile Exchange. Crude oil jumped almost 16 percent since the agreement of OPEC.
One day after OPEC's surprise decision to cut oil supplies, President Bush pressed Saudi Arabia and other cartel members not to act in ways that threaten the U.S. economy. The president's highly unusual message to OPEC underscored the administration's concerns about the potential impact of higher energy prices on the nation's fragile economic recovery in the run-up to next year's presidential election.
World oil prices surged more than a dollar after OPEC's decision, with U.S. light crude settling at $28.29 a barrel and London Brent at $26.81. As for American market, Brent crude futures were slightly firmer in late morning trade, as the market mulled the effects of OPEC output curbs on winter supplies, analysts said. "The market is a little stronger this morning, and I think people are thinking about the OPEC cut and its effect on supplies going into winter," said analyst Andrew Whittock of Williams de Broe.
Oil prices are up nearly 10 per cent since the OPEC cartel agreed to cut production by 900,000 barrels per day. The announcement sparked fresh interest from investment hedge funds to buy oil futures, which brokers say could drive US prices above the $30-a-barrel pain barrier for US economic growth. New York heating oil futures are up about 16 per cent from a four-and-a-half month low set on September 22 as the US energy market prepares for the peak demand winter season.


Author: Alexandra Belyaeva

Source : Neftegaz.RU