Image: OPEC meeting
Ouahab Hebbat  /  AP
Saudi Oil Minister Ali Naimi speaks to reporters upon arrival at the OPEC meeting in Oran, Algeria, on Tuesday.
updated 12/17/2008 1:52:29 PM ET 2008-12-17T18:52:29

OPEC on Wednesday agreed to slash 2.2 million barrels from its daily production — its single largest cut ever — while bloc outsiders Russia and Azerbaijan announced their own cutbacks of hundreds of thousands of barrels from the market.

"I hope we surprised you," OPEC President Chekib Khelil said when asked whether the size of the cut would shock moribund oil markets into an upward trend. "If you're not surprised we need to so something about it."

And yet markets weren't impressed.

Crude oil sank to $40.20 after the announcement, a level not seen since the summer of 2004 and a clear sign investors are more worried that the world is heading for a long and painful recession in which energy use will continue to erode.

In just five months, crude has given up all of the price gains made over the past four years.

Making matters worse for OPEC, Moscow distanced itself from direct ties with the 13-nation producers' group, further dampening OPEC hopes of coordinated production cuts that might put a floor under crude prices.

OPEC said oil ministers of the 11 nations under the group's quota system agreed to take 4.2 million barrels a day off the market, but that includes two previous announced cuts that totaled 2 million barrels.

That leaves the new output reduction announced Wednesday at 2.2 million barrels, effective Jan. 1.

Still, even the record cut was unable to counterbalance consumers' concerns about the dismal world economy.

In the U.S., the world's largest crude consumer, the Federal Reserve's decision to slash its target interest rate to nearly zero buoyed global stock markets Tuesday and early Wednesday.

But the news on the U.S. economy is expected to get worse before it gets better. Businesses, which have already cut nearly 2 million jobs since January, keep laying off workers in the face of slumping demand.

The government reported Tuesday before the Fed rate announcement that home builders slashed production in November by 18.9 percent, the biggest drop in nearly a quarter century. That pushed activity down to a record low annual rate of 625,000 units as the woes in the property market, where the current economic troubles began, showed no signs of abating.

Focusing on the shrinking oil market, OPEC noted in its statement that "crude volumes entering the market remain well in excess of actual demand."

"Moreover, the impact of the grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices," it said.

The group said "if unchecked, prices could fall to levels which would place in jeopardy the investments required to guarantee adequate energy supplies in the medium to long term."

In addition to signaling that a major cut was in the offing in the days leading up to the Oran conference, OPEC ministers had expressed hope that Russia — the No. 2 producer after Saudi Arabia — would join in a significant cutback that would bolster prices.

Such support would be significant. Non-OPEC members Mexico, Norway and Russia last slashed production in the late 1990s, at a time oil was selling for about $10 a barrel.

But although Russian Deputy Premier Igor Sechin and Azeri Energy Minister Natik Aliev announced cutbacks of a total of more than 600,000 barrels a day, their commitments appeared largely symbolic.

The Russians indicated their reductions had already been implemented in November, while Azerbaijan's output had already been reduced by about a third due to production problems earlier this year.

Among those hoping for Moscow's support was oil powerhouse Saudi Arabia.

"We also hope that other producers who are not in OPEC will chip in for the purpose of bringing stability to the market," said Saudi oil minister Ali Naimi said, in a nod to Russia.

Sechin, in comments to The Associated Press, said "Russian oil companies have already made a decision to cut deliveries to the market ... approximately equivalent to 350,000 barrels per day." But he specified that his country's cuts had already been enacted ahead of the OPEC meeting.

Sechin did hold out the possibility of further reductions, saying Russia was ready to pare another 320,000 barrels a day "if we see the continuation of the current level of prices on the world oil markets."

But with Russian production falling, due in part to lagging investment, it was unclear whether some of the cuts enacted or proposed were simply a way of packaging Moscow's inability to keep up present output levels. Even before Sechin's comments, Russian output — now close to 10 million barrels a day — was expected to decline by 1 percent this year and by around 2 percent in 2009.

That — and the fact that Russia was announcing reductions already enacted — diminished the significance of its move.

Sechin's vague comments on further cooperation with OPEC — he mentioned plans for possible "permanent observer status" without specifying what that meant — also signaled Moscow's reluctance to trade its traditional independence for closer ties with the 13-nation producers' group.

Sechin did not rule out full membership eventually, but said, "We are not rushing." A member of the Russian delegation who asked for anonymity because he was not authorized to comment was blunter, saying his country had no interest in joining OPEC.

OPEC President Khelil sought to cast a positive light on the Russian moves, suggesting that while Russia might rethink membership it was a sovereign country that can "cut maybe more strongly or less strongly — or maybe (do) nothing."

"We cannot tell them, you know, what to cut, and how to cut, and when to cut. They have to make their own decision."

But the Russians "are probably going to change their minds in the future and become full members," he said.

Azerbaijan's Aliev said his country "will support the OPEC cuts," slashing up to 300,000 barrels a day from the country's output. That would be more than a third of total production for the country on the oil-rich Caspian Sea.

Still, Azerbaijan's proposed cuts may be involuntary. After an accident on the main BP pumping platform in October, oil industry analysts say the country's output has dropped to around 500,000 barrels a day — the level Aliev was proposing at Oran.

More on OPEC   |  Algeria

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