OPEC to cut production

OPEC will cut its production target by 4 percent as scheduled, the president of the group said Wednesday - a move that analysts say could drive crude oil prices higher, agency reported.

The Organization of Petroleum Exporting Countries, which pumps about a third of the world's oil, will reduce its output ceiling by 1 million barrels per day effective Thursday.

Analysts said the decision could boost oil prices to the psychologically important threshold of $40 per barrel. But prices fell in the wake of the widely-anticipated announcement.

The big question now is how serious OPEC members will be in complying with its new, lower target of 23.5 million barrels per day. An expected drop in seasonal demand during the April-June quarter and quota-busting by individual members of the group could eventually dampen the effects of the cut, analysts said.

A recent surge in oil prices had led some of the group's 11 members to suggest postponing the cut, but OPEC's most influential oil minister, Saudi Arabia's Ali Naimi, prevailed in his effort to press ahead.

"Notwithstanding the prevailing high prices, crude markets remain more than well supplied," OPEC President Purnomo Yusgiantoro said. "The conference reconfirmed the new production ceiling effective April 1."

OPEC had agreed last month in Algiers, Algeria, to make the cut on April 1, but recent discomfort with rising prices in the United States and other importing countries had led some OPEC members to reconsider.

Kuwaiti Oil Minister Ahmad Fahad Al-Ahmad Al-Sabah had earlier suggested delaying the cut, but ended up supporting the decision to trim its target starting Thursday.

"We made decision to apply the Algiers decision. We're going to meet again in June ... and at that time we're going to review the market," Algerian Oil Minister Chakib Khelil told reporters.

OPEC was forced to balance consumers' desire for lower oil prices with its own fears that swelling inventories and a seasonal lull in springtime demand could cause prices to plunge.

Most OPEC members are taking advantage of the current high prices by pumping as much oil as they can. Excluding Iraq, which doesn't participate in the group's quota agreements, OPEC is already exceeding its target by an estimated 1.5 million barrels.

If individual members have the discipline to reduce their actual output in line with their lower target, crude prices could initially reach $40 per barrel, said Leo Drollas, chief economist of the London-based Center for Global Energy Studies. But he believed output would remain higher than the quota, and prices would eventually fall to around $28.50 in the second quarter.

Kevin Norrish, head of commodities research at Barclays Capital in London, also predicted it would "be difficult ... to achieve compliance" but that U.S. gasoline prices were to remain high, with possible spikes yet to come.

"It's not that they don't have enough crude oil. It's that they're not able to process the crude oil into gasoline quickly enough," he said. The effect on European gasoline prices, which are heavily taxed, would be "much more muted." OPEC's head of research, Adnan Shihab-Eldin, told a post-meeting news conference that the supply-and-demand was irrelevant to the high crude prices, adding that "what's driving the market is gasoline in the United States" and the speculators that market had attracted.

Gasoline prices have climbed to new nominal highs in the United States, according to some surveys. The nationwide average rose to $1.80 a gallon in the latest Lundberg survey of 8,000 stations across the United States.

U.S. light, sweet crude reached a 13-year peak of $38.35 per barrel on March 17. Traders had anticipated that OPEC would stick with its planned cut, and U.S. crude futures for May delivery fell $1.03 to $35.22 per barrel in New York. In London, May contracts of North Sea Brent were down 92 cents at $31.53 per barrel.

In the United States, the high oil and gasoline prices have become an issue in the presidential campaign.

Democratic contender Sen. John Kerry said that as president he would stop pumping oil into the nation's emergency stockpile until prices fell and would pressure OPEC to provide more oil. A spokesman for President Bush blamed high prices on the failure of Congress to approve Bush's energy proposals in 2001, and the Bush campaign started an ad accusing Kerry of favoring higher gasoline taxes.(*)