Opec slashes output by 1.5 million barrels a day to underpin oil prices

Opec ministers agreed yesterday to stick to a 6.5 per cent cut in output for at least six months as the oil producers' cartel rubber-stamped its widely trailed decision to order the reduction of 1.5 million barrels a day.

The price of a barrel of Brent crude oil gained 2 per cent on the news, before ending the day down 4 cents at $20.32, in what analysts described as a "buy the rumour, sell the fact" reaction. Opec ministers will review the policy at their next meeting on 15 March.

The decision is likely to trigger an immediate rise in petrol prices although economists are confident any rise in the oil price will be short lived.

The Petrol Retailers' Association said prices in the UK could rise by 2p or 3p, reversing a recent slump in prices from about 77p a litre at the beginning of the year to 69p now.

The key to yesterday's decision was an agreement by five major non-Opec, oil-producing countries ­ Russia, Mexico, Norway, Oman and Angola ­ to cut their output by almost 460,000 barrels a day. Opec, which has already reduced its official production by 3.5 million barrels a day this year, was reluctant to continue to watch as producers outside the group increased their market share as a result.

Analysts said the impact on the oil price would depend on whether Opec can force its members to comply with its decision. In its communiqué, Opec urged members to stick to the deal in order to "achieve lasting market stability at fair and equitable price levels that are good for the welfare of producers and consumers alike. To this end, the conference will continue to monitor both global economic developments and the supply/ demand situation, in close consultation with other producers, in the coming months to ensure that the desired results are, indeed, realised".

The latest data for November put the group's adherence to cuts made earlier in the year at more than 80 per cent. The 10 members with quotas ­ Iraq excluded ­ pumped 600,000 bpd, more than their ceiling. Lawrence Eagles, an oil analyst at brokers GNI, said the best Opec could hope for was a real cut of 1.3 million barrels, which would still leave a surplus of stocks in the second quarter of the year. "What they are trying to do is to push prices over $20 and I think if they could do that they would be happy," he said. "What Opec really requires is a startling rebound in the world economy."

Mr Eagles said that without that, it was unlikely that the cartel would be able to push prices back into the price bracket of $22 to $28 it believes is consistent with a stable market.

Chakib Khelil, who is currently Opec President, told reporters after the meeting: "I think we will be happy with anything above $20 for Brent."

If oil were to stay below that psychological level next year then ­ despite any short-term rise in petrol prices ­ this would be welcome for the world's major economies, which are struggling to climb out of a global recession. A low oil price boosts economic growth as it leaves consumers with more disposable income to spend on other goods. The Cologne Institute for Business Research said yesterday that the German economy would grow more than expected next year if the price of oil stayed below $20.

Economists at Dresdner Kleinwort Wasserstein have calculated that a $10 fall in the crude oil price would boost European GDP by 0.2 per cent,

"Cheaper oil will act as a significant tail wind to real economic growth in the second half of 2002, peaking in 2003," it said.

It would also help central banks by pushing inflation down, by as much as 0.2 percentage points in the UK next year, according to DKW's research.