February 10, 2004

In a surprise move, OPEC agreed on Tuesday to cut excess production of crude oil at once and lower output quotas by 1 million barrels a day effective April 1. Oil prices rose in New York and London on the news, but the brief buying spree quickly lost momentum.

The Organization of Petroleum Exporting Countries expects the combined cuts to curb its production by about 10 percent, or 2.5 million barrels a day.

OPEC members agreed to the two-stage output reduction in an attempt to keep oil prices stable when warmer weather is expected to erode demand in major importing countries.

\"We are agreed that we will cut 1 million barrels from April 1,\" said Qatari oil minister Abdullah bin Hamad al-Ateiyah.

London Brent futures climbed 54 cents to $29.65 a barrel on the surprise cut, while U.S. light crude gained 58 cents to $33.41.

\"The markets discounted the cut for the whole of last week, and they are going to start moving up from here,\" said Man Energy analyst Edward Meir.

\"It's a clever move by OPEC, giving the market some support before the second quarter,'' said Oystein Berentsen, head of crude trade at Norway's Statoil.

But analysts were generally sceptical about how easily the cut, effective April 1, could be combined with a decision to cut out 1.5 million barrels per day of leakage above official output limits, effective immediately.

\"Given how much they are leaking people will want to see how much of the cut they implement,\" Berentsen said. \"There's a question mark over their credibility.''

And after an initial price leap, buying lost momentum after UAE Oil Minister Obaid bin Saif al-Nasseri said the cut could be reversed at the group's next meeting on March 31, if necessary.

\"It a big call,\" said Kevin Norrish of Barclays Capital in London of the proposed one million bpd cut and 1.5 million bpd clamp down on leakage.

\"After the market's initial kneejerk reaction, it will be more sceptical, probably with good reason.\"

Prices are still near the top of their $6-a-barrel winter rally, fueled by tight supplies combined with cold weather in key heating energy consuming regions.

The April cut in OPEC's official output target of 24.5 million barrels a day is unconditional, said Obaid al-Nasseri, oil minister for the United Arab Emirates.

OPEC's urging its members to better comply with agreed quotas was expected, but its decsion to make an additional cut in its formal output came as a surprise.

The group is still smarting after its 1997 decision to increase production just before an Asian financial crisis that sent oil prices plummeting to $10 a barrel. OPEC has tried recently to take pre-emptive steps to prevent another such price collapse. In September, it defied predictions of an unchanged production target by announcing a 900,000 barrel cut in its output ceiling.

OPEC has a long history of pumping oil in excess of its quotas, but Kuwait's Oil Minister Ahmad Fahad Al-Ahmad Al-Sabah said its members would be much more serious this time.

\"All the signals and all the studies show that the second quarter will be a very bad quarter ... Everybody, for his benefit, has to be strict with these resolutions,\" the Kuwaiti minister said.

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