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VIENNA, Austria -- OPEC took steps yesterday to insure oil prices stop dropping and on a plan that they hope will reduce the cartel's production and keep prices from falling when seasonal demand dips early next year. The agreement would lead to a net reduction of 1.5 million to 1.7 million barrels a day in OPEC's actual output.
To achieve that goal, the group will take a counterintuitive approach of raising its formal target for oil production in hopes that members will adhere more strictly to the new quota, the Associated Press reported.
Analysts estimate that OPEC is producing as much as three million barrels a day above its existing target of 21.7 million barrels. This gap between OPEC's target and its actual output widened during the autumn, leading many observers to question the group's credibility. OPEC supplies about a third of the world's crude.
Under the plan, which was proposed by Saudi Arabia, OPEC's most powerful member, the new production target will be increased by 1.3 million barrels a day, or 6 percent, to 23 million barrels effective Jan. 1. At the same time, OPEC urged members to comply with their new quotas, the report said. OPEC is fearful of oversupplying the market ahead of a seasonal, post-winter decline in demand in key markets in the Northern Hemisphere. The new target will last indefinitely.
The cartel needed to do something to salvage its credibility in the market, said Falah Aljibury, an energy consultant based in Alamo, Calif. By raising its output target to "legitimize" some excess production while also requiring better compliance with its quotas, the cartel sends a message that it is in better control of its own affairs, he said.