Tuesday January 16 10:07 AM ET OPEC Forges Ahead with Planned Supply Cut

By Peg Mackey and Michael Georgy

VIENNA (Reuters) - OPEC (news - web sites) forged ahead on Tuesday with plans for a substantial reduction in oil supplies, ignoring the pleas of Western petroleum importers for caution.

Leading cartel member Saudi Arabia appeared confident that the Organization of the Petroleum Exporting Countries would agree to curtail production by just over five percent.

``We expect a pro-rata reduction of 1.5 million barrels a day from February,'' Saudi Oil Minister Ali al-Naimi told reporters on his morning run in Vienna, ahead of Wednesday's 0930 GMT meeting.

Naimi was speaking the day after U.S. Energy Secretary Bill Richardson finished a six-nation tour of cartel members with nothing to show for his efforts to persuade the group to make only a modest supply cut.

Not only has OPEC rebuffed U.S. calls, backed by the European Union (news - web sites), for supplies to be maintained to prevent another damaging upward spiral in energy costs.

Some producers, including Venezuela, Algeria, Indonesia and Qatar, will press for an even larger reduction of up to two million bpd. Riyadh's position, though, looks set to prevail.

``They've made their position plain. It would be a big surprise now if Saudi doesn't get its way,'' said Peter Gignoux at brokers Schroder Salomon Smith Barney.

The expected reduction would bring official production limits for 10 OPEC members down to 25.2 million barrels daily. Actual cuts are likely to prove closer to one million bpd because some countries now are unable to meet their quotas.

Oil Price Rallies

Consumer concerns have been underlined by an oil price rally, coming in the past two weeks after Riyadh first made its intentions public.

London Brent blend crude futures were steady on Tuesday at $26.18 a barrel after recent rises while U.S. light crude futures were five cents firmer at $30.10.

Brent had slumped $12 from a 10-year high of $35 in October after OPEC lifted production four times and worries emerged about a slowdown in the U.S. economy.

Saudi Arabia's Naimi said OPEC now was determined to defend its $25 target for a basket of crudes that was priced on Monday at $24.60.

``We saw the supply-demand data and we decided we had to make a reduction. Had we carried on with output at this level we would have flooded the market,'' he said.

Riyadh already had informed customers of its share of lower OPEC deliveries for February, the Saudi minister added.

The West fears that a big cut in output could aggravate an economic slowdown in the United States by forcing up energy costs.

London's Centre for Global Energy Studies, run by ex-Saudi oil minister Sheikh Zaki Yamani, said OPEC cutbacks will prevent the restoration of world oil inventories from last year's lows.

``OPEC appears to believe that the world economy can live happily with $30 oil. It is wrong,'' the CGES said in a report.

``By cutting output from February onwards, OPEC will prevent the rebuilding of stocks that the world needs.''

OPEC disagrees.

``The market has integrated the expected production cut into the price, so we will not see major price changes after the decision,'' said OPEC President Chakib Khelil.

``We don't see oil having a tremendous impact on inflation. There may be more risk in Asia but in Europe, the United States and Japan I do not see much impact on inflation and growth,'' Khelil, the Algerian oil minister, said.

OPEC has decided to take a pragmatic approach to the thorny issue of how to judge unpredictable export levels from Iraq. Baghdad's United Nations (news - web sites)-monitored sales have been running low in recent weeks but the cartel is assuming a return to full capacity soon.

Producers stood ready to fill in any gap if necessary, said Khelil.

http://dailynews.yahoo.com/h/nm/20010116/bs/energy_opec_dc_4.html

-- Martin Thompson (mthom1927@aol.com), January 16, 2001

Answers

OPEC building consensus for 5 percent cut in supply

VIENNA, Austria (AP) _ A 5 percent reduction in OPEC oil exports appeared all but certain Tuesday, with the group"s three largest producers _ Saudi Arabia, Iran and Venezuela _ agreeing on the need to curtail output and a fourth member, Kuwait, confirming the size of the proposed cut. Members of the Organization of Petroleum Exporting Countries planned to meet formally Wednesday to reassess their output quotas.

http://abcnews.go.com/wire/World/ap20010116_882.html

Most have expressed support for trimming supplies by a total of 1.5 million barrels a day. Asked if he expected a quick agreement on such a cutback, Kuwaiti Oil Minister Saud Nasser Al-Sabah told reporters: "We have that already." Al-Sabah spoke as he arrived at his hotel in downtown Vienna. A Nigerian oil industry source, speaking on condition of anonymity, said earlier that sentiment had "crystallized" around a 5 percent cut. Saudi Arabia, OPEC"s influential heavyweight, was among those arguing for such a reduction. The likely impact on consumers remains murky, primarily because Iraq, an important OPEC member, continues to withhold the bulk of its crude from the market. Iraq _ embroiled in a pricing dispute with the United Nations, which regulates all Iraqi exports _ has not participated in the cartel"s production agreements since the Persian Gulf War, and OPEC members said they aimed to trim output regardless of what Iraq does. However, Saudi Arabia and Qatar suggested that OPEC"s other 10 members would make up for any shortfall created by an Iraqi withdrawal from the market. Iraq has slashed its crude exports by approximately 1.7 million barrels a day, shipping just 600,000 barrels a day in December. The interruptions have continued this month. "We will interfere when we see the market is facing some difficulties. We will not let a shock happen for consumers or producers. We will be there at the right moment," said Qatari Oil Minister Abdullah bin Hamad Al Attiyah. Oil prices have been surging in recent weeks, jumping above $30 a barrel last week and reaching a four-week high. February contracts of light, sweet crude were trading Tuesday at $30.30, up 25 cents a barrel on the New York Mercantile Exchange. Meanwhile, North Sea Brent for delivery in February was trading at $26.20, up 2 cents on the International Petroleum Exchange in London. OPEC members fear that prices could collapse if they fail to act, as the once-torrid U.S. economy begins to cool and seasonal demand for heating oil begins to diminish in the second quarter of the year. OPEC supplies almost two-fifths of the world"s crude. The group is eager to avoid repeating its mistake of December 1997, when it decided to boost output shortly before the Asian financial crisis throttled demand. Prices bottomed out a year later at around $10 a barrel. OPEC members are advocating production cuts in spite of U.S. and European Union requests that they stick to their current quota of 26.7 million barrels a day. U.S. Energy Secretary Bill Richardson traveled to the Persian Gulf over the weekend to lobby OPEC members not to cut output. "If OPEC decides to make cuts, we hope it will act in a cautious and measured fashion," he told reporters in London on Monday.

-- Martin Thompson (mthom1927@aol.com), January 16, 2001.