December 18, 2008 - OPEC on December 17 agreed what is probably the biggest and certainly one of the most complicated output cut agreements in its history, announcing a new 24.845 million b/d target for those 11 members bound by production pacts.
Desperate to stop oil prices from falling further after the $100/barrel slide from July's record levels, ministers meeting in Oran, western Algeria, came up with a complex arrangement to arrive at the new ceiling, using estimated OPEC-11 production in September this year of 29.045 million b/d as the baseline for a total cut in output of 4.2 million b/d.
Some of this oil has already been removed from world markets, following earlier OPEC decisions first to remove oversupply above official limits and then to cut their combined target by 1.5 million b/d from the start of November.
OPEC president Chakib Khelil and Qatari minister Abdullah al-Attiyah said the new agreement meant the group would make an effective cut of 2.2 million b/d but did not say how they arrived at this volume.
OPEC delegates explained that the 4.2 million b/d comprised a 500,000 b/d reining in of overproduction agreed at early September talks, a 1.5 million b/d cut from official allocations implemented in November, and a new cut of 2.2 million b/d agreed in Oran.
If OPEC were to comply fully with the new ceiling, it would imply a bigger cut of more than 3 million b/d from actual OPEC-11 production in November, which OPEC itself - using estimates derived from secondary sources - said on December 16 was 27.939 million b/d.
With world demand for oil falling as a result of the global economic slowdown, the cut is designed to reduce oversupply on world markets and prevent oil prices from falling further.
"Having reviewed the oil market outlook, including overall demand/supply projections for the year 2009, in particular the first and second quarters, the Conference observed that crude volumes entering the market remain well in excess of actual demand," OPEC said in its communique.
"The grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices, which have fallen by more than $90/barrel since early July 2008...if unchecked, prices could fall to levels which would place at jeopardy the investments required to guarantee adequate energy supplies in the medium-to-long term," it added.
"In light of the above, the Conference agreed to cut 4.2 million barrels a day from the actual September 2008 OPEC-11 production of 29.045 million b/d, with effect from 1 January 2009, with Member Countries strongly emphasizing their firm commitment to ensuring that their production is reduced by the individually agreed amounts," it said.
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Ahead of the meeting, ministers had said they expected the talks to result in what appeared to be a straightforward cut of 2 million b/d, the volume proposed by Saudi Arabian oil minister Ali Naimi December 16.
Markets, meanwhile, shrugged off OPEC's agreement, US light crude benchmark WTI dropping by more than $3/b to an intra-day low of $40.20/b as the front of the crude curve on NYMEX moved deeper into contango and crude stocks at Cushing, Oklahoma, site of the NYMEX delivery point, climbed by 4.7 million barrels to 27.511 million barrels, the highest level since April 2007.
The world's biggest oil consumer, the US, slammed OPEC's cut as "shortsighted" amid the continuing global economic turmoil.
"OPEC's decision to cut is shortsighted," Department of Energy spokeswoman Healy Baumgardner said in a statement. "If there are any lessons from the past year, it is that markets react faster than ministers. What we want is to see oil markets well-supplied, with adequate investment in future production."
OPEC president Khelil, however, said OPEC could reduce output again at its next scheduled meeting in March if market conditions warranted such a move. "If there is a need to cut more we will cut more in order to balance the market," he said.
In the meantime, he said, OPEC was ready to meet before the March 15 meeting if necessary. "We have to wait and see how the market reacts," he said.
Saudi oil minister Naimi, speaking just ahead of the meeting, said OPEC's output cut was aimed more at balancing world oil markets than at pushing oil prices upward to the $75/barrel level which Saudi King Abdullah last month said was a fair price for oil.
"The cut has nothing to do with the $75/b price," Naimi said, when asked how much production needed to be removed from world oil markets to restore prices, currently languishing well below $50/b.
"You have to understand the difference. The fair price is intended for a much more noble cause. We need every producer to produce, but many marginal producers cannot produce at $40/b and therefore we believe that the $75 price is probably more conductive to the marginal producers to be able to continue to produce so that we do not have shortages in the market and we avoid future skyrocketing of prices," he said.
"The purpose of the cut is hopefully to bring the markets in balance, avoid gyration in prices. That is the purpose," Naimi said.
Naimi said Saudi Arabia was currently producing 8.2 million b/d of crude - some 200,000 b/d more than the 8.014 million b/d which Platts calculates as the kingdom's new allocation under the deal--having reduced its production by 1.5 million b/d since August, when it pumped 9.7 million b/d.
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