OPEC's decision to cut production boosts Oil market

Oil prices took a jump on Monday in Asian market after the news came that the Organization of Petroleum Exporting Countries (OPEC) is going to remove its crude from oversupplied world markets by 1 million barrels a day. OPEC oil ministers today lined up to support the cut as quickly as possible.

The market was eagerly awaiting a viable conclusion of the production cut issue, which was under consideration, by the 11-member cartel made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC’s second biggest producer, Iran along with Algeria on Sunday has publicly backed the reduction. The recently announced reduction is OPEC’s first since April 2004.

Over the weekend, media reports cited OPEC officials as saying the cartel would reduce its output by nearly 4% to emanate a 24% decline in prices since mid-July.

The oil production trim plan was made public on Thursday by a senior OPEC delegate. “I think there is more or less consensus for 1 million bpd,” OPEC President Edmund Daukoru said in a telephonic message on Sunday. “The reference point is the (official) 28 million bpd ceiling.”

Crude for November delivery today jumped 64 cents to US$60.40 a barrel in electronic trading on the New York Mercantile Exchange. Oil for November delivery had fell 27 cents to close at US$59.76 a barrel on Friday at NYME as investors were ambiguous about the OPEC’s resolve to cut, after falling to a low of US$58.85. It was below US$3.15 from the week-ago closing level of US$62.91. And, the closing of US crude at US$59.76 was off nearly US$20 from a mid-July peak of US$78.40.

Moreover, heating oil futures surged 1.35 cents to US$1.7075 a gallon (3.8 liters) while gasoline prices rallied 1.03 cents to US$1.5145 a gallon. Natural gas futures soared 14.8 cents to US$6.575 per 1,000 cubic feet.

Meanwhile, as per the reports, a majority of OPEC members support a voluntary reduction. According to an OPEC source, the cartel President had written to oil ministers in the last two days seeking their supporting for the supply checks. “It is expected that there will be a decision on Monday to cut one million barrels per day from the official ceiling after consultations between the ministers,” the source quoted as saying.

The source further informed that the deal could be ratified as early as mid-December at a meeting scheduled for Dec. 14 in Nigeria. Though, OPEC is due to hold a meeting in December, but some members want to hold an emergency session before the end of this month.

In support for an emergency meeting, Algerian Energy and Mines Minister Chakib Khelil said, "What is important is that the market finds the OPEC position credible. That is why it is necessary to have a meeting to make a decision on the cut and to act on it."

At the same time, the analysts say that the current rise in oil prices was not only because of concern about a potential reduction in supply amid sturdy demand, but also a reflection of a dynamic worldwide economy.

Joseph Capurso, an analyst with Commonwealth Bank of Australia in Sydney, said, "The market's been toying for a while with whether OPEC will or will not cut production," adding further "But whether or not it happens, the world economy is strong, so that will put a floor under prices, there isn't a concern that U.S. oil consumption is going to fall into a hole."

In spite of the high stocks cushion, United States has expressed its unhappiness over OPEC’s plan to cut supply. Al Hubbard, an economic adviser at White House said President George W. bush was unhappy with oil prices near US$59 a barrel.