Opec’s decision to cut supplies risks keeping oil prices at very high levels, cutting short a fall from July’s record price, the International Energy Agency warned on Wednesday.
Washington also criticised the oil cartel’s move, which came less than 60 days before US elections in which voters are citing high energy prices as one of their top concerns.
“We’d like to see more oil on the market, not less,” said Dana Perino, the White House spokeswoman. “We certainly disagree with it.”
The cartel’s surprise announcement that it would cut its supply by 520,000 barrels a day to abide by official production levels boosted oil prices in early trading to more than $100 a barrel. But prices later fell after a sharp rise in the dollar.
In mid-day trading, US crude oil lost $1.30 to reach $101.96 a barrel, having risen to a high of $104.97 earlier in the day. Brent crude, the European benchmark, fell $1.65 to $98.69. Oil is trading at a five-month low after a 30 per cent drop from its peak of almost $150 a barrel.
David Fyfe, head of markets at the IEA, the western nations’ oil watchdog, said the global economy was in a fragile state as high prices had an impact on growth and inflation. “Removing supplies may prove unhelpful,” he said.
“We are concerned for the potential of oil prices remaining at very high levels. At $100 the price of oil remains very high.”
Opec’s cut in production – the first it has announced since December 2006 – comes after a broad sell-off in commodities, particularly oil, bringing hope that lower raw materials prices can boost a slowing global economy and ease inflationary pressures. That could change if Opec acts to defend high prices.
Thomas Stenvoll, of UBS in London, said the cartel was willing to act to shore up prices after Brent fell below $100.
“This points to a line in the sand being drawn by Opec,” he said.
Costanza Jacazio, of Barclays Capital in New York, said Saudi Arabia would be happy with prices below $100 a barrel but added: “It seems that other Opec members wished to give a slightly stronger signal. For those members it appears that the $100 level is shaping up as a ‘soft floor’ or ‘alarm bell’.”
The cartel explained, however, that its decision was driven by an attempt to balance supply and demand rather than any consideration of prices.
It said prices had dropped significantly, driven by lower demand especially in developed countries, increased oil supply, the strengthening of the US dollar and easing of geopolitical tensions.
“All the foregoing indicates a shift in market sentiment causing downside risks to the global oil market outlook,” Opec said in a statement. Oil traders are also concerned about weakening oil demand, particularly in the US.
Now the cartel has the tough task of enacting what it has agreed. The lion’s share of the cutback will have to come from Saudi Arabia, which unilaterally boosted production above its official quota when prices were high earlier in the summer.
If the group cannot attain at least some of the announced cutbacks, it risks exacerbating the price drop as traders bet on the cartel’s powerlessness.
Abdulla el-Badri, Opec’s secretary-general, said on Wednesday that member countries must adjust production to their official quotas “immediately”.
However, Opec delegates said it was unclear if Saudi Arabia would cut back its output, with some suggesting the kingdom was not pleased with the cartel’s decision to announce publicly a reduction. Riyadh, they said, wanted to cut its overproduction quietly without an explicit declaration.
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