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OPEC Confirms Will Cut 500,000 Barrels a Day In February

cnbc.com
Thursday, 14 Dec 2006 | 12:18 PM ET

OPEC confirmed it will leave oil production unchanged for now, but set the stage for a cut of 500,000 barrels a day, or 2%, in February.

The oil producers' group agreed to the reduction next year despite warnings from the International Energy Agency, the oil consumers' club, that a reduction agreed in October was already leaving the market tight.

"We are committed to supplying the market, but we want to establish a balance between supply and demand," OPEC President Edmund Daukoru said.

Front month January contracts for U.S. light crude recently climbed $1.03 to $62.40 a barrel.

London Brent crude for January rose 92 cents to $62.25, ahead of its expiry on Thursday, despite analysts' doubts about the meaning of the cut, which appeared to be a compromise between OPEC hawks and doves.

"OPEC wants to signal a cut, but many members don't want to reduce output. It's a fudge which gets round the market and reconciles the two different views on what the group should do," Geoff Pyne, an independent oil analyst, said.

By postponing a further reduction until peak demand has passed, OPEC is responding to importer nations' concerns that a cut now will drive prices higher and hurt their economies.

"They are really trying to manage the first half of 2007," said Roger Diwan, managing director of PFC Energy on CNBC's "Morning Call." "They know that demand will look much better in the second half."

According to Diwan, OPEC is trying to get through the second quarter, a period when demand for oil is typically weak, and keep oil prices above $55 a barrel.

However, some think the plan is misguided.

"I think they are trying to micromanage seasonality," said Mark Gilman, an oil analyst at the Benchmark Co. He said OPEC is focusing on seasonal demand trends rather than on product demand trends.

OPEC's advisory committee had proposed of cut of 300,000 barrels starting Jan. 1, 2007, consistent with a previous decision to lower output. OPEC, which produces over a third of the world's oil, curbed supplies by 1.2 million barrels a day in November and has delivered about two-thirds of that promised cut, Reuters reported.

Ahead of the meeting, some ministers and officials signaled their priority was to ensure compliance with that deal, which succeeded in arresting a 25% price slide, before making additional reductions. As a result, the outcome of the meeting took some by surprise.

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OPEC is likely to cut production. Insight on the summit, with John Kingston, Oil Platts Global Director and CNBC's Joe Kernen

"I don’t think this market needs it," said John Kingston, global director of Platts on CNBC's "Squawk Box." "There’s no doubt that the steps they have taken have definitely tightened up this market."

U.S. government data released on Wednesday showed crude stocks falling by 4.3 million barrels as imports declined, while the International Energy Agency said industrialized countries' crude supplies fell by 40 million barrels in October -- a trend that continued last month as well. This data supports the notion that the prior cuts are starting to be felt in the market.

However, the OPEC ministers believe the market is oversupplied -- stocks in the U.S., its top consumer, are the highest since 1998 for the time of year -- but some fear cutting during peak demand could drive prices further above $60 and hurt economic growth at importer nations.

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