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Crude oil bounces back as Saudis join OPEC cuts

10 November 2001 , 06:12365
Crude oil prices surged Thursday, bouncing back from their 28-month lows of earlier in the week, as Saudi Arabia threw its substantial weight behind deeper-than-expected production cuts from the Organization of Petroleum Exporting Countries.

Saudi Arabia, the world's biggest exporter of crude, called for OPEC to cut its output quotas by 1.5 million barrels a day or 6.5 per cent in order to trim excess global supplies and lend support to slumping world crude prices.

Up until now, OPEC had been expected to consider a one million b/d production cut when its ministers meet in Vienna next Wednesday, although there had been rumblings this week that the number could increase to 1.4 million.

"One million barrels per day is not enough," Saudi oil minister Ali al-Naimi said Thursday. "The number one [million] is a joke." He said a 1.5-million-barrel cut would be an "easy option" for OPEC.

What's more, OPEC secretary-general Ali Rodriguez said the production cuts would likely be implemented for Dec. 1, not Jan. 1 as previously expected. The earlier cut would hit the market at a time when demand is strongest for supplies to produce winter home-heating oil.

The prospects of a bigger and earlier reduction in OPEC supplies prompted a flurry of oil buying on the New York Mercantile Exchange Thursday. The benchmark West Texas Intermediate contract for December delivery jumped $1.08 (U.S.) to close at $21.17 a barrel, its highest close since Oct. 30.

The upturn in oil prices also gave a lift to Canadian oil and gas stocks on the Toronto Stock Exchange, which had slumped along with prices earlier in the week. The TSE's oil and gas index rose 1.3 per cent on the day to close at 8,996. Leading the way was oil-rich senior producer Nexen Inc. of Calgary, which rose $1.55 (Canadian) or 5 per cent to $32.40.

Tim Evans, senior energy analyst at IFP Pegasus in New York, said there's a "better than 50-per-cent chance" the Saudis will succeed in convincing the other members of OPEC to go along with the 1.5-million-barrel cut. However, he cautioned that "the market is going to be disappointed" if OPEC settles on a smaller reduction in output, or if the cartel members struggle to fully comply with such a deep cut.

"We've seen a reaction [in the market] to the comment," Mr. Evans said. "Now we'll enter into a wait-and-see mode until after the [OPEC] meeting next week."

December crude had dipped as low as $19.55 (U.S.) a barrel Tuesday after a series of dismal U.S. economic indicators heightened pessimism about energy demand. In addition, there were growing signs that OPEC might be gearing up for a market-share war with major non-OPEC exporters such as Russia, Norway and Mexico, which would certainly drive prices lower.

Recent statements from several OPEC officials had suggested the cartel is growing tired of cutting production to keep prices high at the expense of encouraging new production and losing market share to non-OPEC producers. OPEC now supplies about 35 per cent of the world's oil, down from 40 per cent last year, and another round of production cuts will further erode its market share.

In fact, Mr. al-Naimi even suggested Thursday that "it would be nice" if non-OPEC producers chipped in with a 500,000 b/d cut of their own in support of the OPEC cuts.

However, given the Saudi oil minister's other comments, analysts doubt a showdown is imminent between OPEC and non-OPEC producers.

"The comment says they aren't going for the price-war option just yet," Mr. Evans said. However, analysts believe the issue will come to a head in spring when OPEC could face a need for another one million b/d of production cuts as a result of the normal seasonal drop in demand.

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