OPEC surprises with output cut

26 September 2003
OPEC confounded expectations once again on 24 September. In spite of statements from almost every OPEC oil minister indicating that the production ceiling would be left unchanged at 25.4 million barrels a day (b/d), the gathering in Vienna decided to rein in output to 24.5 million b/d - the quota between February and June this year. The cut will come into effect on 1 November. October loading schedules are already in place.

Prices immediately surged on the news. Brent was trading at $27.04 a barrel on 25 September, compared with $25.65 a week earlier and even lower levels in the interim. Expectations of an unchanged ceiling were a factor in depressing prices to four-month lows ahead of the meeting, which in turn helped persuade OPEC to cut. OPEC is well aware of the need to rein in output to cope with the return of Iraqi output at significant levels. However, prices remained in the region of or above $28 throughout the summer on instability in Iraq and low inventories, making a lower production ceiling politically unacceptable and in conflict with OPEC's stated upper price target.

Prices have been falling since the end of the US summer driving season and its ramped-up refinery runs. US crude and product inventories showed a strong build-up in the week to 12 September, the last data available before the Vienna meeting. The International Energy Agency (IEA) may be wishing that US buyers had not chosen that particular week to raise imports to their highest level since records began - 10.8 million b/d. IEA chief Claude Mandil had been pushing for an easing of output restrictions.

Saudi Arabia and Kuwait are reported to have pushed through the 900,000-b/d cut. The build in inventories, likely to continue for much of the fourth quarter before winter sets in, is one factor. However, Iraq is the key. Given the one-month lag between the decision to cut and implementation, a move to accommodate rising Iraqi exports was needed to be taken sooner rather than later to prevent serious oversupply and a potential slump in price. Exports from the southern Mina al-Bakr terminal have topped 900,000 b/d in September and the northern export pipeline is scheduled to reopen in October.

Newly-appointed Iraqi Oil Minister Ibrahim Bahr al-Uloum was allowed to participate at the OPEC meeting as a full member, despite Venezuelan objections. He forecast that Iraqi exports would reach 1.5 million b/d by year-end and 1.8 million b/d by the end of March. 'We have plans to double production to 3.5 million-4 million b/d by 2005 and move higher to 6 million b/d by the end of the decade,' said Al-Uloum. His remarks no doubt sent a chill down fellow delegates' spines. OPEC knows that more cutting is inevitable.

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