Opec output cut raises prospect of $40 crude

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The Independent Online

The oil producers' cartel Opec brushed aside pleas from the United States yesterday and imposed a 4 per cent cut in production, effective from today, triggering fears of a renewed surge in prices that could derail the global economic recovery.

Members of the Organisation of Petroleum Exporting Countries had come under intense pressure from the US, the world's largest consumer, to take action to stem the rise in crude oil prices, which recently hit $38.35 a barrel, their highest level for 13 years.

Some analysts said the production cut was likely to push prices well above $40 a barrel.

Oil ministers from the 10-member cartel agreed to move ahead with their February decision to lower quotas by a combined 1 million barrels a day to 23.5 million barrels.

Stock markets fell on both side of the Atlantic on fears high oil prices would crimp economic recovery. "There are a whole series of little negatives that have crept in to give people discomfort and the oil price is another one," said Nigel Richardson, strategist at AXA Investment Managers.

The oil price has been above Opec's target range of $22 to $28 a barrel for four months and has not fallen below $22 for two years. Opec members, led by Saudi Arabia, have said prices may decline in the next three months as demand slows with warmer weather in the Northern Hemisphere.

But analysts believe the cartel's members are trying to offset the impact on their domestic budgets of the 10 per cent fall in the dollar over the past year, which has slashed oil revenues.

Julian Lee, an analyst at the Centre for Global Energy Studies, calculates that Saudi Arabia needs an oil price of £28 a barrel on Opec's basket of crude prices to balance its budget.

Energy prices have become a political issue in the US in the run-up to November's presidential election with John Kerry, the Democratic challenger, calling on George Bush to stop filling the nation's strategic reserves as a way to check rising petrol prices.

Yesterday the White House stopped short of openly criticising Opec but called for adequate supplies and said: "It is important for producers not to take actions that hurt our economy."

Oil prices tumbled despite Opec's announcement as traders reacted to data showing that unexpectedly heavy imports had helped US crude stocks reach their highest level in a year and a half.

Brent crude futures in London fell 82 cents to $31.63, while US light crude was down $1.08 at $35.17.