OPEC Agrees Larger-Than-Expected Cut to Revive Price

Dec. 17 (Bloomberg) -- OPEC, supplier of more than 40 percent of the world’s oil, agreed to cut production quotas by a larger- than-expected 9 percent to revive prices as a global recession reduces demand for crude.

The Organization of Petroleum Exporting Countries set a quota for 11 of its members of 24.845 million barrels a day, starting Jan. 1, compared with its current target of 27.308 million barrels a day, OPEC President Chakib Khelil said. The record 2.46 million barrel-a-day cut is larger than a 2 million-barrel drop indicated yesterday by Saudi Arabian Oil Minister Ali al-Naimi.

“OPEC is sending a message that they are trying to cut pretty seriously,” said Mike Wittner, head of oil research at Societe Generale SA in London. “If they need more cuts, there will be more cuts.”

Crude oil fell as low as $39.88 a barrel in New York, the lowest since July 2004, on skepticism OPEC will adhere to its new agreement and after a government report showed rising U.S. crude stockpiles. Oil’s $100-a-barrel collapse from July’s record has curbed revenue for producers, threatening government budget shortfalls. Saudi Arabia’s King Abdullah said last month that producers need crude at $75 to spur investment in new fields.

Russia, the biggest oil exporter outside of OPEC, today pledged to curb exports too, as it did a decade ago when oil sank toward $10 a barrel.

‘Dramatically Low’

“If OPEC would not do what it has to do given demand destruction, the price could stay at a level that is really dramatically low,” Venezuelan Oil Minister Rafael Ramirez said after today’s meeting.

OPEC announced the new quota by saying the group had agreed to reduce output by 4.2 million barrels a day from September’s actual production level of 29.045 million barrels a day for the same 11 nations. That measure of actual production came from an average of analyst and news agency estimates compiled by OPEC’s Vienna-based secretariat.

To be sure, OPEC often pumps more than its quotas permit. Last month, the 11 nations, excluding Iraq and Indonesia, pumped 629,000 barrels a day more than the ceiling, according to OPEC’s monthly report. U.S. Energy Information Administration acting head Howard Gruenspecht said compliance with cutbacks will be “critical” in determining how oil markets will react.

Today’s decision is OPEC’s biggest ever reduction in quotas, exceeding a 1.9 million-barrel, 8.3 percent cut agreed in March 2000, when Iran was temporarily excluded from the ceiling. The new quota will be 2.2 million barrels a day lower than OPEC’s December production, Khelil said.

Russian Help

Russia may cut exports by 320,000 barrels a day next year if prices remain weak, after reducing daily exports by 350,000 barrels last month, Russian Deputy Prime Minister Igor Sechin said earlier today in Oran.

Other non-OPEC producers, including Kazakhstan, may trim supply as well, Sechin said. Azerbaijan may lower production as much as 300,000 barrels a day, Azeri Energy Minister Natig Aliyev said in Oran. Mexico’s energy ministry spokesman Hector Escalante yesterday declined to say whether it will aid OPEC cuts while Norway has said it has no plans to lower production.

Forecasts for oil consumption have shrunk during the past few months as the global recession weighs on consumers and industries. The International Energy Agency says global oil demand will contract this year for the first time since 1983.

In the U.S., oil consumption will be almost flat through 2030, as the use of biofuels, rising prices and new car efficiency standards temper demand, the Energy Information Administration, part of the U.S. Energy Department, said in a statement today.

London Summit

“The fall in oil prices in recent months has benefited the economy at a difficult time and helped hard-pressed consumers,” U.K. Energy Minister Mike O’Brien said in a statement after OPEC’s announcement. The U.K. will host a summit of energy ministers, including Saudi’s al-Naimi, in London in two days time.

Falling oil prices may delay or halt investment in exploration and production projects, setting up a possible “supply crunch” in future years, IEA Chief Economist Fatih Birol said on Dec. 10. Cheaper fossil fuels may also deter efforts to develop wind, solar and other alternative energy sources.

Oslo-based StatoilHydro ASA and Royal Dutch Shell Plc of The Hague postponed investments in Canada’s oil sands this year after tumbling prices reduced potential profits.

Saudi Arabia’s Manifa oil field will start in 2011 only if consumers require the extra crude, al-Naimi said in an interview today. “When we need it, it will be there,” he said, adding that the start of the field depends on the “market situation.”

OPEC will next meet on March 15 in Vienna and chose Angolan Oil Minister Jose Maris Botelho de Vasconcelos as its president for 2009.