ALGIERS, Feb 10 - OPEC on Tuesday announced a surprise cut in oil supplies from April, propelling crude prices higher and drawing a caution from the United States that it risked stunting world economic growth. The deal slices four percent from production limits for the group that controls half the world's oil trade, to 23.5 million barrels a day effective April 1. The Organisation of the Petroleum Exporting Countries said it would also seek immediately to eliminate 1.5 million barrels a day of leakage being pumped above existing supply quotas. For consumer nations the pact looks like a threat to world economic recovery and is a reminder that OPEC appears prepared to defend prices above its official $22-$28 target range. In a strong warning to the cartel, U.S. Treasury Secretary John Snow said any decrease in crude oil output by OPEC producers would be "regrettable," and would effectively be a tax on American consumers.
Speaking to reporters in Florida, Snow said energy costs were not as significant a percentage of U.S. economic output as in the past, but added that "energy price increases are certainly not welcome." Oil prices spiked on the agreement that underlines OPEC's capacity to pull a surprise after an unexpected supply reduction last September. At the New York Mercantile Exchange, crude oil for March delivery settled trade up $1.04, or 3.2 percent, at $33.87 a barrel, valuing OPEC's reference basket of crudes well above its $22-$28 target range. "Doing what they've done today clearly shows they want to support a $28 basket, rather than $25," said Nauman Barakat of brokers Refco in New York. Leading producer Saudi Arabia said action was needed to prevent a price crash as demand slackens and world oil inventories build after the northern hemisphere winter. "The inventory, where it is now, is fine, we don't want to see it building," said Saudi Oil Minister Ali al-Naimi. "We don't want to see a precipitous fall in prices."
CREDIBILITY ON THE LINE
Dealers said the agreement would protect OPEC against a price slump but could undermine cartel credibility because of the ballooning gap between official quotas and actual output. "It's a clever move by OPEC, giving the market some support before the second quarter," said Oystein Berentsen, head crude trader at Norway's Statoil. "But given the amount they are leaking people will want to see how much of the cut they implement. There's a question mark over their credibility." The decision casts doubt on assurances from Riyadh that it wants no more than $25 a barrel for OPEC benchmark crude. "It's a big call," said Barclays Capital analyst Kevin Norrish. "Our own view is that OPEC does not need to cut by as much as it appears to be aiming at." Saudi had appeared to soften its tone on oil price policy since OPEC last met. Naimi said at a December meeting that higher prices were justified by the impact of the weak dollar on producers' spending power. Since then, and again in Algiers, he has made a point of re-emphasising Riyadh's commitment to OPEC's central $25 target. Naimi said cuts were justified by projections for a heavier-than-normal seasonal second quarter fall in demand "We cannot countenance a reduction in supply of three to four million barrels per day and not take action at this meeting -- that would be too late," he said. The International Energy Agency, adviser on energy to 26 industrialised nations, provided OPEC with plenty of ammunition for its decision.
The Paris-based IEA is forecasting demand will undercut world supply in the second quarter by as much as four million barrels a day, more than double the normal seasonal gap.//