Saudis cut oil output beyond Opec limit

Saudi Arabia has unilaterally slashed its oil production by more than its agreed Opec limit, the kingdom said on Tuesday.

The rare and politically difficult move highlighted the huge losses the Saudis and other oil-producing nations face following the collapse in crude prices as the result of the global economic crisis.

EDITOR’S CHOICE
Falling oil prices not good news all round - Jan-12Oil industry lifted by falling costs - Jan-12In depth: Oil - Dec-11Riyadh’s decision to step outside the group underlines how severely Opec, the oil cartel that supplies about 40 per cent of the world’s oil, is struggling to reverse the slide in oil prices, in spite of the record 2.2m barrel a day cut it announced last month. Oil prices traded on Tuesday at about $39 a barrel, boosted by Saudi Arabia’s decision, but remain well below the kingdom’s $75 target.

Ali Naimi, Saudi Arabia’s oil minister, said on Tuesday: “Let me tell you this. We are working very hard to bring balance. . . We will do what it takes to bring [the market] back to balance.”

Saudi Arabia’s announcement is expected to bring the world’s largest oil producer’s output to 7.7m b/d, 300,000 barrels below the amount it pledged under the Opec’s December agreement.

That means the kingdom will have cut production by 20 per cent since July, waiving a larger share of its revenue than other producers in the hope of boosting prices.

It also puts Riyadh in the spotlight politically just as a Barack Obama takes over the White House as US president and the Senate again considers a bill that would allow the Department of Justice to prosecute Opec for price-fixing.

Saudi Arabia generally is loath to stick its neck out in this way and may well call on other Opec members to follow its lead and cut their production further.

Jean-François Seznec, Middle East expert at Georgetown University, said: “It’s a very, very significant event. It is basically that the Saudis want to move things much more quickly than they are moving now.”

But he said the kingdom was taking a risk in moving towards a strategy that backfired on Riyadh in the 1980s.

At one point in 1986 Saudi Arabia had slashed production so much that it nearly had to import oil to cover domestic needs. But other oil producers took advantage of the situation and boosted their production. That scuttled any price recovery, prompting Saudi Arabia to lose copious revenues and market share.

The risk this time, says Mr Seznec, is that other Opec members will take the opportunity to renege on their agreements to reduce production.

Source : FT

My feel is the oil prices will start to pick up.