OPEC oil ministers are hoping to push prices back towards the $75 level by removing a record two-million barrels per day from oil markets.
As the ministers convened in Oran, Algeria, in mid December 2008, oil was trading just above $44 a barrel.
The 12 members of the Organization of the Petroleum Exporting Countries were aiming to build a floor under prices that have dropped more than $100 from a July 2008 peak above $147 a barrel.
Saudi Arabia, the world’s biggest oil exporter, admitted, readily: “The cut may lead to higher prices or may not.”
The expected cut, the third in 2008, would bring a total reduction in OPEC supply to four-million barrels of oil per day (4MMBOPD), nearly a five percent cut in world oil supplies.
OPEC’s wish to encourage other producers to cut back was countered by Russia whose Deputy Prime Minister Igor Sechin said in a speech to OPEC that Moscow did not plan to join in coordinated output cuts and did not want to join the group.
“You must understand the purpose of the $75 price is for a much more noble cause,” the Saudi Oil Minister said. “You need every producer to produce and marginal producers cannot produce at $40 a barrel.”
“Therefore we believe that $75 is probably more conducive to marginal producers to continue so we don’t have a shortage in the market and we avoid the future skyrocketing of prices.”
The influential Saudi Oil Minister clearly outlined the kingdom’s route to lower production.
The country was pumping 8.2MM BOPD in mid-December 2008 against 9.7MMBOPD in August, 2008, four months earlier.
“The difference is 1.5MMBOPD, that is what we’ve done,” Naimi said.
Saudi Arabia’s implied output target is about 8.477MMBOPD under existing OPEC curbs.
To have a lasting price impact, any OPEC deal must to be strictly observed.
According to independent observers cited in OPEC’s monthly report, the group’s compliance in November to existing cuts was only just over 50%.
Analysts said deeper cuts would further test discipline in the group. That restraint would be needed to slim down growing world oil stocks.
A slump in consumption has lifted oil inventories in OECD industrialised nations to the equivalent of nearly 57 days of forward demand, a measure OPEC closely monitors. The industry norm for this time of year is about 52 days.