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18 Dec, 2008 07:16

OPEC slashes production with Russia joining in

OPEC has slashed crude production by a larger than expected amount in response to falling global demand. Russia and other non-members have joined in, with a promise of more to come if prices stay flat next year.

At its extraordinary meeting, in the Algerian city of Oran, OPEC decided on Wednesday to cut crude production by a further 2.2 million barrels per day, to add to the 2 million barrel per day which has been trimmed since September. 

The latest cut, a record, and more than was even being talked about the day prior to the meeting by Saudi Oil Minister Ali al Naimi, is aimed at preventing a further collapse in crude prices. Julian Lee, Senior Energy Analyst, at the Centre for Global Energy Studies says the widespread expectation of a 2 million barrel per day cut, wasn’t having much effect on prices.

“A cut of 2 million barrels per day was widely publicised ahead of the meeting. It didn’t really have much impact on prices, normally you expect to see prices react to the anticipation of what the meeting will bring, particularly there seems to be such unanimity as there was before this meeting.  And that really didn’t happen very much. ”

The OPEC move was backed by some non-member countries, boosting OPEC's ability to prop up the market.  Azerbaijan announced a 300 thousand barrel a day cut, and Kazakhstan is also reducing output.  Russia’s Deputy Prime Minister, Igor Sechin, says it has already cut output 350 thousand barrels a day in November and is ready to cut up to 320,000 a day more next year if current low prices persist, as they are hitting the capacity of oil companies to invest in new production.

“The fair price should include investment for oil output. Almost all Russian companies are working on new oilfields. So a part of this investment is direct operating expenses for any oil company. Cuts in investment for these projects will lead to huge cuts in supply.”

Deputy Prime Minister Sechin also proposed holding an OPEC meeting in Russia and said that the organisation is considering a new status for Russia, as a permanent observer.

Opec has taken another set of measures to bring oil market to some state of balance, and closer to what producers are calling a fair price, of $70-80 per barrel .The danger for the producers is that if the cut is too big, and prices spike in response, that could tip the world economy into an even deeper recession than it’s already in.

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