Opec cuts production to shore up falling oil prices

'Stabilisation' strategy will see cartel reduce supply by 2.2 million barrels a day

The cartel of the world's biggest oil-producing countries slashed production by more than expected yesterday in an attempt to shore up prices hammered by the global recession.

Although supply reductions were expected from the Organisation of the Petroleum Exporting Countries (Opec), which met in Algeria yesterday, the plan to pull an extra 2.2 million barrels per day (bpd) out of production from 1 January exceeded even the highest predictions.

Added to the 2 million bpd already cut from supply in two tranches this autumn, the cut of 4.2 million bpd constitutes about 14 per cent of Opec's average daily supply of just over29 million barrels.

The changes have been designed to stabilise the oil price, which has fallen by more than two-thirds to hover around the $40 mark, from the unprecedented high of $147 fetched per barrel in early July.

A higher price is crucial to ensuring long-term investment, according to Opec, which controls 40 per cent of the world's oil supply.

"Prices are now well below levels that could be considered sustainable for the longer term, when we look at the investment climate for the industry... bad news for the industry, and for producers and consumers alike," Chakib Khelil, the president of the cartel and the Algerian minister for Energy, said.

"We need to review the situation carefully in this critical period and respond appropriately in support of market order and stability for the short, medium and long terms."

Light, sweet crude for January delivery fell 8 per cent, or $3.54, to settle at $40.06 a barrel in New York. The price of oil had been on the rise for a week in anticipation of supply cuts, after data from the International Energy Agency(IEA) which showed global demand for oil had fallen for the first time in 25 years and hints of future reductions from O pec members.

But the question is whether the proposals will be delivered. Saudi Arabia's Oil minister made an unusually open statement last week confirming it had cut supply by 8.49 million bpd in November, in line with Opec's reduced targets. But the IEA report suggested other Opec members – notably Ecuador, Venezuela, Libya and Iran – were not pulling their weight.

Yesterday's statement from Opec described the reductions in terms of the whole 4.2 million bpd, backdated to September, and made explicit reference to the "firm commitment" of members to ensuring they were meeting their individual targets.

John Waterlow, a principal analyst at Wood McKenzie, said that the unexpectedly large cut signals Opec's determination to tackle the unstable oil price, and should not be interpreted as a sign of panic.

"The member countries have looked around and read the signs and are sending a clear signal that they will do something to prevent further falls," he said."The question now is what kind of adherence we will see from individual members – but there doesn't seem to have been a problem agreeing the strategy."

Russia, which is not an Opec member, was a high-profile addition to the cartel's meeting in Algeria. But the Russian Deputy Prime Minister, Igor Sechin, confirmed yesterday that the country was neither cutting its production, nor lobbying to join Opec.

Mr Waterlow said Russia's oil output was already falling, due to a combination of the falling price and changes to its domestic tax regime, and consequently any moves on oil by the Russians were likely to be more political gestures than reductions.