VIENNA (Reuters) – After hours of wrangling, OPEC on Wednesday agreed to revise its complex output targets and said the move would effectively cut supplies by half a million barrels per day (bpd).
Ministers of the Organization of the Petroleum Exporting Countries (OPEC) had been widely expected to stick to existing production allocations, which have been in place all year.
But some voiced concern about a growing surplus of oil on the market and prices on Tuesday sank to a five-month low below $102 a barrel, around 30 percent below a record hit in July above $147.
U.S. crude was trading 65 cents higher at $103.90 at 5:13 a.m. EDT. The price had risen by a dollar immediately after OPEC’s announcement.
OPEC President Chakib Khelil said Wednesday’s decision amounted to a cut from the group’s actual July output.
“I think if you do your own calculation properly, it will be a lowering of production by about 520,000 barrels per day,” Khelil said.
His estimation of how much output will be removed from the market derived from amounts OPEC members were really producing, rather than agreed limits.
OPEC’s new production ceiling is 28.8 million bpd, compared with its earlier target of 29.67 million bpd, ministers said.
They seized the opportunity of Indonesia’s decision to suspend its membership to the group to adjust targets and give allocations to Angola and Ecuador, which have joined over the past two years.
The producer group’s output targets have long been opaque and analysts interpreted the decision as keeping existing allocations intact, while calling for tighter compliance.
“The communique is much as expected,” said Paul Horsnell of Barclays Capital. “However, it also talks of strictly adhering to quotas, when we might have expected the trimming back in coming months to be done more discreetly.”
Others agreed the surprise was that OPEC has made public its intention to remove supply above agreed limits.
“The statement is clear as mud, but really what it says is members should keep to quota, which basically means Saudi Arabia should stop the additional barrels that it has provided over the summer, which was somehow expected,” said Olivier Jakob of Petromatrix. “I would say it’s only half of a surprise because they have made a formal announcement.”
TARGETS VERSUS ACTUAL PRODUCTION
OPEC was estimated to be pumping roughly 790,000 bpd above target, the bulk of which came from Saudi Arabia.
The leading exporter announced unilaterally at a specially convened meeting in Jeddah in June that it would pump 9.7 million bpd, around 750,000 bpd above its agreed ceiling.
The kingdom said it was responding to strong consumption and a senior Gulf source said on Tuesday he expected it to continue producing at around 9.7 million bpd if demand held steady.
“The market is fairly well-balanced and we have worked very hard since the June meeting to bring prices to where they are now. I think we have been very successful,” Saudi Oil Minister Ali al-Naimi told reporters on arrival in Vienna on Tuesday.
He has yet to comment following OPEC’s output decision, which was announced at around 3 a.m. (0100 GMT) on Wednesday morning following a meeting that did not begin until after 10 p.m. on Tuesday because of Ramadan fasting.
Ahead of the conference, most OPEC ministers had seemed broadly happy with the oil price and had indicated there was probably no need for urgent action, although they said there was a risk the market could become oversupplied in the future.
Iran and Venezuela have traditionally taken the most hard-line position.
They have big-spending populist governments and need a high oil price, but had said around $100 a barrel was reasonable as a strengthening U.S. dollar compensated for the negative impact on oil producer earnings of falling oil prices.
The other surprise of the night was that major energy producer Russia, which attends OPEC conferences as an observer, sent a very senior official.
“Broad cooperation with OPEC is one of Russia’s priorities,” Interfax news agency quoted influential deputy prime minister Igor Sechin as saying. “OPEC is one of Russia’s key partners on the global oil market.”
In the past, Russia has agreed to trim production in line with OPEC output cuts to support prices.
OPEC will further review its production policy at a meeting in Algeria in December.