OPEC Calls on Members to Cut Output to Reduce `Huge Oversupply'

By Fred Pals and Ayesha Daya
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Sept. 10 (Bloomberg) -- OPEC, which supplies more than 40 percent of the world's oil, urged members to cut production to comply with output quotas after prices fell to a five-month low.

The Organization of Petroleum Exporting Countries agreed at a meeting in Vienna earlier today to a total production limit for 11 members of 28.8 million barrels a day, unchanged from their previous targets. OPEC Secretary-General Abdalla El-Badri said an output cut of about 500,000 barrels a day would reduce a ``huge oversupply'' of oil on the market.

Iran and Venezuela were among members that called on OPEC to take action to support prices that slid 29 percent from July's record as slower global economic growth curbed demand. Brent, a benchmark to price two-thirds of the world's crude oil, fell below $100 a barrel in London for the first time in five months yesterday.

``They will do whatever they can to maintain prices above this $80-$100 range,'' Johannes Benigni, managing director of JBC Energy in Vienna, said in a Bloomberg television interview today. ``If the market slides lower you will hear more from them.''

Oil prices rallied after OPEC's announcement, rising as much as 1.5 percent to $104.82 in electronic trading on the New York Mercantile Exchange. Crude for October delivery traded at $104.40 a barrel as of 12:34 p.m. London time.

Indonesia Withdraws

OPEC's quota was adjusted after Indonesia withdrew from the group. The target, set in September 2007, had been 29.673 million barrels a day including Indonesia's production target of 865,000 barrels a day, according to Bloomberg data.

OPEC's decision to remove barrels from the market could prove to be ``counterproductive,'' according to David Fyfe, who heads the oil industry and markets division at the International Energy Agency.

The IEA, an adviser to 27 nations, cut its forecast for global oil demand next year by 140,000 barrels to 87.6 million barrels a day because of slower U.S. consumption.

``High oil prices are still hurting,'' Fyfe said in a telephone interview from Paris.

Before the cut, OPEC was producing 900,000 barrels a day above its quota, El-Badri told a press conference in Vienna today.

Oil rose to a record $147.27 a barrel in July. Most analysts polled by Bloomberg had expected the group to keep production quotas unchanged and production near record levels.

No Change

Saudi Arabia isn't planning to reduce its own production even after OPEC told members to return to their official targets, a Saudi oil official said today.

There is no change in its oil policy and Saudi Arabia will supply whatever customers demand, an oil official of the country said today.

Airlines, including Canada's Zoom Airlines and Oasis Hong Kong Airlines Ltd., went out of business and many cut back on routes as oil prices surged to records and inflation accelerated, prompting people to drive less, lowering demand for gasoline.

The global economy may slow to about 3 percent in late 2008 from 5 percent in the previous year before re-accelerating toward 4 percent in 2009, said John Lipsky, first deputy managing director of the Washington-based International Monetary Fund, on Sept. 9.

The global economy is cooling after the U.S. housing slump sparked a lending squeeze while a surge in food and oil prices eroded the spending power of companies and consumers.

`Defensive Measure'

OPEC's decision is ``definitely a defensive measure to keep prices above $100,'' said Jonathan Kornafel, a director for Asia at Hudson Capital Energy. ``They don't want to see us go back to $140 or $150 but they want us over $100. It's a bit of a shock to the market and that's why we're up.''

OPEC members have increased production this year as Saudi Arabia, the world's largest producer, sold more barrels to balance shortfalls elsewhere and slake the developing world's growing thirst for crude. That pushed output above the group's agreed targets.

``Since the market is oversupplied, the conference agreed to abide by September 2007 production allocation (adjusted to include new members Angola and Ecuador and excluding Indonesia and Iraq) totaling 28.8 million barrels a day,'' OPEC's communiqué said. ``Levels with which members committed to strictly comply.''

``We should do what we can to keep prices at the level of around $100 a barrel,'' Venezuelan Oil Minister Rafael Ramirez told reporters yesterday. ``We are concerned about the drop of demand by the end of the year.''

Stabilize Markets

Most of the increase in OPEC production in the past few months has come from Saudi Arabia, which pledged to raise output by 500,000 barrels a day through June and July to calm prices. It hosted an emergency meeting of global oil producers and consumers in Jeddah in June to discuss how to stabilize markets.

The market is ``well supplied'' and ``the market is in a very healthy position,'' Saudi Arabian Oil Minister Ali al- Naimi, who sets policy for the world's largest oil producer, told reporters before ministers started closed-door talks at OPEC's Vienna headquarters yesterday.

The opinion of Saudi Arabia, OPEC's biggest and most influential producer, differed from that of Iran and Venezuela, who wanted production to be trimmed to official quota levels as they said the market was oversupplied.

To contact the reporter on this story: Maher Chmaytelli in Vienna at mchmaytelli@bloomberg.net; Fred Pals in Vienna at fpals@bloomberg.net