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OPEC agrees to cut oil overproduction

OPEC agreed Friday to reduce output to target production levels early next year, delegates said, in hopes of staving off further declines in the world price without triggering a new buying frenzy.
/ Source: Reuters

OPEC oil producers on Friday agreed to squeeze out excess supply that has lowered world prices from record highs.

Ministers said they would withdraw one million barrels daily of production -- around 3.5 percent of current supply -- from January 1 and meet again on January 30 to discuss whether further cuts were necessary.

"Stocks are building up at a unreasonable rate, This is a preventative measure. It is enough to sharpen the market," said Algerian Energy Minister Chakib Khelil.

The decision will disappoint consumer nations which have urged OPEC not to pull back from a surge in production, saying oil inventories must rebuild to underpin economic growth and calm volatile prices.

Prices are still around 30 percent above the start of the year although U.S. crude has dropped by nearly $13 from a record high of $55.67 a barrel in late October.

Prices edged higher on Friday as the cartel agreed to curb supplies to stem a 23 percent price slide from October's record highs above $55.

U.S. light crude gained 12 cents to $42.65 a barrel, up from the $40.45 four-month low struck on Wednesday. London's Brent crude rose 31 cents to $39.98 a barrel.

OPEC is cutting back in the heart of the northern winter, when heating demand peaks. Although heating stocks in major consuming centers are low, only sustained severe weather would put real strain on supply, analysts said.

"It seems like they've done enough to stabilize prices at current levels. I don't think they've done anything dangerous to the market," said Adam Sieminski of Deutsche Bank in London.

The Organization of the Petroleum Exporting Countries has been producing at the highest level in 25 years to meet rising demand in the United States and China and compensate for disruptions to supply from Iraq.

OPEC wants excess oil removed from the market as it fears an out-of-season increase in oil stocks during the northern winter will weaken prices.

"That's why we took the decision -- to avoid an extraordinary build-up in inventory levels," Saudi Arabia's Oil Minister Ali al-Naimi said.

5-percent reductions
Seven of the 11 cartel's producers will reduce supply by around 5 percent each to make up the overall reduction. Iran, Venezuela and Indonesia will be exempt as they are pumping at or below official limits, while Iraq does not have a quota.

Top OPEC producer Saudi Arabia will shoulder half the total cut. The kingdom's planned 500,000 barrels per day reduction would take its output to around 9 million bpd -- still around 225,000 bpd above quota.

Iran and Kuwait have said OPEC's end-January meeting should consider cutting the overall 27 million barrels daily ceiling for the second quarter period when demand is seasonally weak.

"Producer concern over a precipitous fall in prices is somewhat overstated," said the International Energy Agency (IEA), which advises industrialized nations on energy policy, in a monthly report on Friday.

"Capacity constraints, geopolitical uncertainty and demand growth will not disappear overnight," the IEA said.

Although high prices have had little impact so far on oil consumption, world demand growth will slow next year because a squeeze on fuel supplies for Chinese power generation should ease, the IEA said.

Prices are on course for their highest yearly average on record in nominal terms, but a fall in the dollar's value has eroded OPEC's purchasing power from oil sales, which are denominated in the U.S. currency.