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OPEC?s cuts seem to be effective

OPEC?s cuts seem to be effective
Oil prices are reaching the level of $50 per barrel for the first time after several months as lower exports from OPEC are draining oil inventories especially in US.

Oil prices are reaching the level of $50 per barrel for the first time after several months as lower exports from OPEC are draining oil inventories especially in US.

Oil prices are reaching the level of $50 per barrel for the first time after several months as lower exports from OPEC are draining oil inventories especially in US. The Organization of Petroleum Exporting Countries has lowered its output three times since September to combat price declines and prevent a glut on world markets. Ministers meet in Vienna on March 15. Meanwhile, U.S. crude-oil supplies probably fell 500,000 barrels last week, according to a survey before an Energy Department report this week.

OPEC"s cuts seem to be effective this time because of the high compliance by each member state, something that did not happen in the past. But this time, the pressure on oil prices was so huge that oil producers did not have the alternative of cheating for more revenues. It is characteristic that Saudi Aramco will reduce shipments to Japan in April for a fifth month, according to officials at three refineries that got notices.

?The combination of OPEC restraint and higher refinery runs is eroding the overhang in inventories,? said Christopher Bellew, senior broker at Bache Commodities Ltd. ?It"s premature to say the market has turned a corner, but we are seeing an arrest in the slide in prices.?

Cartel members will have the chance to analyse the market during their critical summit in Vienna this weekend under better conditions, as prices look more firm. The question that OPEC members will have to answer is that of full compliance with last cuts or new ones, in order to achieve a new rally for oil prices? And under the current economic conditions, is the world economy capable of affording higher oil prices?

Qatari oil minister Abdullah bin Hamad al- Attiyah said this week that OPEC must fully comply with existing reduction agreements before making new ones. We must not forget that Mr. Attiyah used to act like a ?hunter of opinions? before the cartel"s meetings and has repeatedly prepared the ground for Saudi"s opinions. Saudi Arabia wants OPEC to comply with its existing output ceiling and opposes a further production cut, al-Hayat newspaper reported, citing an unidentified person.

OPEC members produced 25.39 million barrels a day in February

?We cannot discuss another cut until we see the compliance at 100 percent,? said al- Attiyah yesterday in Doha, Qatar"s capital. ?The first step is to make sure we see full compliance.? The 11 OPEC members with quotas, all except Iraq, produced 25.39 million barrels a day in February, down from 29.22 million barrels a day in September, according to a Bloomberg News survey of oil companies, producers and analysts.

On the other hand, Kuwaiti officials underpin that compliance with the cuts announced in September is very high, something that opens the road for cartel members for new cuts, in order to support oil prices. Supreme Petroleum Council member Moussa Marafi told the Kuwait News Agency that an OPEC production cut of a million barrels a day would raise prices to over $50 a barrel by the third quarter of 2009.

Marafi said OPEC compliance with the 4.2 million barrels a day of cuts announced since September has been "very high" at 80 percent and would reach 90 percent by the time the group meets Sunday.

Investors expect OPEC to announce fresh production cuts of between 500,000 and 1 million barrels a day, said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore.

"If the cut exceeds expectations, there would be a short-term pop in prices," Chu said. "But it will take months for the cut to affect supplies in the U.S. It's not an overnight thing." Iraqi Oil Minister Hussain al-Shahristani said Monday on Sharqiyah television station that oil prices were too low and OPEC is working to "inch them up."

Investors largely brushed off OPEC's output cut announcements for months, doubting whether the 12-member group would have the discipline to implement them. But OPEC has complied with most of the quota reductions, earning back some credibility, Chu said.

"Everybody used to produce over quota, and OPEC lost credibility," Chu said. "According to Game Theory, cartels don't work because each member gains from cheating."

"But with prices so low, they've had to cooperate."


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