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OPEC Approves Production Cut



OPEC's secretary general says the cartel has decided to cut petroleum production another 2.2 million barrels beginning January 1. OPEC members have been calling for a production cut to help stabilize prices that have fallen more than $100 a barrel since July.

OPEC Secretary General Abdallah Badri said the new quota will cut a total of 4.2 million barrels per day from September production levels.

The steep cut of more than over two million barrels a day, beginning with the new year, had been expected. OPEC ministers had been predicting some dramatic initiative to try to stem the steep slide in oil prices since July. Earlier, Saudi Arabia and Russia announced oil production cuts. Saudi Oil Minister Ali Naimi proclaimed that there was a consensus within OPEC over the cut.

Russia also intends cutbacks

Russian Deputy Premier Igor Sechin and Azeri Energy Minister Natik Aliev announced cutbacks of a total of more than 600,000 barrels a day.

OPEC President Algerian Oil Minister Chakib Khalil says his group wants to implement cuts alongside non-OPEC oil producers to successfully reduce the excess supplies.

He says that OPEC is talking to non-OPEC members Mexico, Russia and Norway in order to get them to cut production, and that any help on their part in cutting will add to the total effect of an OPEC cut.

Top producer Saudi Arabia noted recently that many oil-producing countries may halt production entirely if prices go under $40 because it will no longer be profitable. The price of a barrel of crude oil has fallen by around 70 percent since reaching a record high of more than $147 on July 11.

Analyst says production cuts may be more that expected

Oil analyst Walid Khadduri of the Middle East Economic Survey (MEES) says the oil production cut may be more than many people were expecting.

"First of all, it is two million by OPEC, and they are estimating 600,000 barrels cut by non-OPEC countries, not just Russia, but maybe other countries, also. And, second, I think it could put a floor for the down trend in OPEC, in the big slide in prices," said Khadduri. "It is a very big step to cut 2.6 million. That is almost like three percent of production. It is more than the market expects."

Despite the large projected cut in production, Khadduri thinks it is possible the global economic crisis could overwhelm OPEC and make the production cut ineffective.

"So, I think the world economic crisis could really make useless this decision. But, they are also trying to deal with another thing, not only the slide in demand because of the crisis. They are trying to deal with the fact that there is counter-seasonal stocking," added Khadduri. "During the winter, consumption increases because of the cold weather. But now what they are seeing is there is a very high storage going on worldwide. So, they are trying to deal with two things, the slide in demand and the rise of storage."

OPEC has a history of reacting too little, too late in past economic crises. In 1999 and 2001, the oil cartel slashed production, but not soon enough to stem the steep fall in prices. This time around, it remains to be seen if OPEC will have more clout in moving oil prices to the $75 level, which many OPEC countries say is the "fair price" for a barrel of oil.

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