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OPEC to cut oil output target by 4 Pct
Updated: 2004-04-01 09:13

With fuel costs already at uncomfortable levels for consumers, OPEC took a step that could push prices even higher by announcing Wednesday that it would cut its crude oil production target by 4 percent.

The Organization of Petroleum Exporting Countries hopes the cut, which takes effect Thursday, will prevent a slide in prices this spring, when the global demand for oil usually slips to a seasonal low.

Overall view of the meeting of oil ministers and delegates of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Wednesday, March 31, 2004 at the OPEC's headquarters in Vienna. OPEC has agreed to carry out its planned cut in output despite already high prices. [AP]
Some analysts said the cut could soon push crude prices above the psychologically important threshold of $40 per barrel. The decision could also worsen the pain for U.S. motorists, who have been paying the highest prices in recent years for gasoline.

OPEC, which pumps about a third of the world's oil, agreed in talks at its headquarters in Vienna to reduce its output target by 1 million barrels per day. Although it had announced plans for the cut when its members met last month in Algiers, Algeria, a subsequent surge in prices led a few of the group's 11 members to suggest postponing the decrease.

OPEC had to balance concerns that high prices could choke off economic growth with its own fears that swelling inventories and a seasonal lull in springtime demand could reduce cause prices to plunge.

Kuwait and the United Arab Emirates proposed postponing the cut, but Saudi Arabian Oil Minister Ali Naimi and the majority of ministers prevailed in their effort to press ahead and reduce the ceiling to 23.5 million barrels per day.

These ministers blamed speculators for much of the froth in prices and argued that the weak U.S. dollar was adding to the problem. Oil is bought and sold in dollars, and the recent decline in the dollar's value has caused the nominal price for oil to increase.

"Notwithstanding the prevailing high prices, crude markets remain more than well supplied," OPEC President Purnomo Yusgiantoro told reporters.

Futures markets, which rose sharply Tuesday on signals that OPEC would lower its output ceiling, responded to the official announcement with a sell-off as traders liquidated their long contracts and took profits. Carl Larry, an analyst at ABN Amro in New York, said this reaction proved that OPEC was at least partly correct in attributing some of the high crude prices to "speculative money."

U.S. crude futures for May delivery fell 49 cents to $35.76 per barrel in New York, while May contracts of North Sea Brent settled 77 cents lower at $31.51 in London.

However, some analysts argued that prices would soon begin to rise again, especially if OPEC showed that it was determined to curtail its actual output and not just reduce its production target. U.S. crude could spike to $40 a barrel "within a week or two," Larry said.

U.S. gasoline prices would stay high and might rise even higher, said Kevin Norrish, head of commodities research at Barclays Capital in London. The main problem wasn't expensive crude so much as limited refinery capacity. "They're not able to process the crude oil into gasoline quickly enough," he said.

Gasoline prices climbed to a nominal record average of $1.80 a gallon nationwide, according to the latest Lundberg survey of 8,000 stations across the United States. But that was still below the inflation-adjusted record set in March 1981, Lundberg said. The March 1981 combined average for all grades was about $1.38, the equivalent of $2.85 in today's dollars.

Costlier crude would have a "much more muted" effect on gasoline prices in Europe, where taxes account for the bulk of the pump price in some countries, Norrish said.

Over the longer term, the expected drop in demand during the April-June quarter and quota-busting by individual OPEC members should help push prices gradually lower, analysts said.

Most OPEC members are taking advantage of the current high prices by pumping as much oil as they can. Excluding Iraq, which doesn't participate in the group's quota agreements, OPEC is already exceeding its existing target by an estimated 1.5 million barrels.

Although he foresees a short-term rise to $40 per barrel, Leo Drollas of the London-based Center for Global Energy Studies said he believed that prices would eventually fall to around $28.50 in the second quarter because producers would continue pumping oil in excess of their quotas.

John Waterlow of Wood Mackenzie Consultants in Edinburgh, Scotland, said prices would probably remain high for several weeks but could fall to $28 or less during the summer.

In the United States, high oil and gasoline prices have become an issue in the presidential campaign.

Democratic contender Sen. John Kerry said that as president he would stop pumping oil into the nation's emergency stockpile until prices fell and would pressure OPEC to provide more oil. A White House spokesman said U.S. President Bush was disappointed by OPEC's decision.

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