OPEC to begin reducing oil output starting Feb. 1

Increase in supplies spurs action aimed at bolstering prices

January 18, 2001|By NEW YORK TIMES NEWS SERVICE

VIENNA, Austria - The Organization of the Petroleum Exporting Countries said yesterday that it would cut production by 5 percent next month in hopes of propping up world oil prices.

Blaming slower growth in what it termed key economies, the organization said the cut, equal to 1.5 million barrels a day, is being taken because crude oil supplies "far exceed demand."

"With the approach of the seasonally lower demand in the second quarter, unchecked production could precipitate a price collapse, serving the short- and longer-term economic interests of neither producers nor consumers," OPEC said in a statement.

The meeting, OPEC's fourth in six months, was called only because of "the decline in prices," the Saudi Arabian oil minister, Ali al-Naimi, told the Dow Jones news service.

Saudi Arabia, the largest producer, will take the largest cut, slowing production by 486,000 barrels a day to 8.2 million. Overall, the cut will bring member countries' oil production to 25.2 million barrels a day.

Oil prices, which had climbed in recent weeks in anticipation of the cutbacks, fell yesterday. Light sweet crude for February delivery was trading at $29.35 a barrel, down 94 cents, on the New York Mercantile Exchange.

The economies of the OPEC countries are almost entirely dependent on oil revenue, and the fall in prices rattled these countries, industry analysts said. A few months earlier, OPEC members had thought that $22 to $25 was an attractive price for a barrel of oil on world markets; most now seek $25 to $30 a barrel.

The cutback in production, set to begin Feb. 1, would most likely take effect amid a significant slowing in U.S. and Asian economies. U.S. officials are particularly concerned that a steep increase in oil prices could push a weakened economy into recession.

OPEC has argued that a cut in production would prevent a glut in oil and avert further declines in prices resulting from a 3.6-million- barrel-a-day increase in output by OPEC nations late last year. OPEC has rejected the idea that a production cut now would hurt the economies of importing nations.

U.S. Energy Secretary Bill Richardson met during the weekend with OPEC leaders to argue for a measured approach to the fall in oil prices. "We advocated having no cut at all," Richardson said Monday after his meetings, "but we recognized there might be some cut. We advocated that the cut be incremental, so that there would be no jolt to the market."

The oil market's full reaction is ex- pected to become evident in the next few days. Last week, traders said that any cut greater than 1.5 million barrels would cause a significant rise in oil prices. Indeed, some price hawks at OPEC, such as Kuwait, Iran and Qatar, had called for cuts of 2 million barrels a day or more.

People close to Richardson's talks said it appeared that the Americans managed to persuade Saudi Arabia, the leading producer, to favor a smaller cut, one still acceptable to other members. That decision appears to have led to the consensus to reduce production by 1.5 million barrels a day.

OPEC's past efforts to micromanage the oil market often have failed. And even if prices were to hold steady for now, other important factors could drive them higher as the planned cuts in output take effect.

For instance, if European countries or the United States experienced severe cold weather in February or March, the demand for heating oil would be expected to jump and to drive up prices. And Iraq, ever unpredictable, has occasionally taken its oil exports off the market. More such surprises, as other OPEC members reduce their output, could push the futures price of oil sharply higher again.

OPEC said it would review markets again at its next regularly scheduled meeting.

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