Top oil exporter Saudi Arabia provided the most visible evidence yet of adhering to OPEC's deal to curb output by telling refiners in Asia that it would cut December supplies by 5 percent, term lifters said on Monday.
State oil firm Saudi Aramco informed at least five customers over the weekend that they would receive about 5 percent less than their contracted allocations next month, the first cut-back in 14 months, industry sources with the refiners told Reuters.
The kingdom ships about half its exports to Asia and a 5 percent cut to the region would equate to about a 175,000 barrels per day (bpd) reduction, or more than a third of the total 466,000 bpd it is expected to cut under last month's OPEC agreement.
The Saudi cut was largely in line with expectations, traders said, suggesting it will do little to spur additional crude demand in Asia in a bearish spot market.
"The cut is in line with our expectations and clearly reflects that OPEC is going in a different direction now. It's been so long since they made a cut," said a source with a refiner in South Korea.
Most traders had anticipated the cut.
A trader with a sixth lifter said the company had yet to receive notice of the December allocations but added that the outlook for December was bearish and a cut would not have much impact on the market.
Oil prices added to early gains after the news, rising above $63 a barrel.
Prices were also buoyed by China's announcement at the weekend of a massive $600 billion stimulus package.
Cuts in Effect
The Organization of the Petroleum Exporting Countries agreed at an emergency meeting last month to lower its output ceiling by 1.5 million bpd, or roughly 5 percent.
It had already said the month before it would take away around 500,000 bpd pumped above its agreed target.
Questions about Saudi Arabia's compliance with OPEC's Oct. 24 deal arose last week, as Asian refiners said they had yet to see any notice of cuts for November at a time when OPEC producers Abu Dhabi, Nigeria and Kuwait had already announced lower volumes for November.
But two industry sources with major lifters later told Reuters that the kingdom had quietly cut their supplies with immediate effect, with a third source estimating that the Saudis had reduced exports by around 900,000 bpd.
With oil demand starting to decline as the world economy tumbles toward recession, many refiners were at ease with the anticipated supply cuts, especially as the credit crisis has elevated the cost of financing inventories.
"Japanese lifters, in particular, had taken into account cuts of 5-10 percent," said one source at a Japanese lifter.
"With a minor 5 percent cut, I don't think there will be much need for spot crude," the source added.
Iran told Indian Oil (IOC) they will cut crude supplies to the state-run firm by about 5 percent from this month, an IOC source told Reuters last week, but it was not immediately clear if Iran has done the same for others.
Saudi Arabia also cut December official selling prices (OSPs) for its grades heading to Asia last week amid slack demand from refiners.
A Reuters survey of OPEC production showed that the group lowered output by roughly 300,000 bpd in September and by another 100,000 bpd in October.
The full impact of the Oct. 24 cut is not expected to be felt until December or January.
Saudi Arabia's production has fallen from around 9.65 million bpd in August to 9.4 million bpd in October, the Reuters survey found.
Allowing for around 2 million bpd of domestic consumption, the kingdom exports more than 7 million bpd.
Signs that Saudi Arabia was making good on the OPEC deal helped give beaten-down oil prices a brief boost last week, but by Friday they had fallen back to below $60 a barrel for the first time in a year and a half.