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Oil Price climbs after Opec agrees output cut

Friday, December 15th 2006 - 20:00 UTC
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Oil gained more than a dollar on Thursday after Opec decided to cut its output by two per cent from February.

The oil producers' group backed the 500,000-barrel-a-day cut despite warnings from the International Energy Agency, the oil consumers' club, that a previous reduction, agreed in October but not fully implemented, was already leaving the market tight. "We are committed to supplying the market but we want to establish a balance between supply and demand," Opec President Edmund Daukoru said. Front month January contracts for US light crude rose US$1.03 to US$62.40 a barrel. London Brent crude for January rose 92 cents to US$62.25, ahead of its expiry on Thursday, despite analysts' doubts about the meaning of the cut, which appeared to be a compromise between Opec hawks and doves. "Opec wants to signal a cut but many members don't want to reduce output. It's a fudge which gets round the market and reconciles the two different views on what the group should do," Geoff Pyne, an independent oil analyst, said. "If more cuts are needed then surely that proves that half the group didn't comply with the cuts last time. So why should those that did cut do so again?" According to analysts estimates, Opec has made good almost two thirds of the pledged 1.2 million bpd reduction that took effect on November 1. Opec ministers put compliance to the new cap of 26.3 million barrels much higher, at above 80 per cent. By postponing a further reduction until peak demand has passed, Opec is responding to importer nations' concern that a cut now will drive prices higher and hurt their economies. Price hawks Iran and Venezuela said they expected oil prices to steady above US$60 as a result of Thursday's agreement. Saudi Arabia insisted price had played no role in Opec's decision. "The market is out of balance - stocks are at more than a five-year high," Daukoru said, despite stocks data showing the previous cut was already having an effect. US government data released on Wednesday showed crude stocks falling by 4.3 million barrels as imports declined, while the International Energy Agency said industrialised countries' crude stocks fell by 40 million barrels in October -- a trend that continued last month as well. The IEA, adviser to 26 industrialised countries, said in its monthly report on Wednesday Opec cuts from Nov. 1 were making themselves felt, "cold comfort for a risk-prone global economy already facing another winter with high oil prices." Analysts said Opec had postponed the cut so as to avoid hitting industrialised nations at the peak of northern hemisphere winter demand. "Feb. 1 cuts make sense as they will impact March deliveries. Opec generally points to weaker product demand in the second quarter as the driving factor for a cut," Harry Tchilinguirian, analyst at BNP Paribas, said. Oil has fallen from a mid-July peak of US$78.40 but is still historically high at triple the price seen at the end of 2001. Higher Asian demand coupled with worries over supply from Iraq, Nigeria, Iran and Russia, helped fuel the rally.

Categories: Economy, Mercosur.

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