Oil rallies as OPEC set to decide on cut

Oil rallies as OPEC set to decide on cut

LONDON (Reuters): Oil prices rose on Wednesday, buoyed by news
that OPEC was set to announce a one million barrel-per-day (bpd)
production cut that will bring the cartel's daily output to the
lowest level in over two years.

Oil traders and analysts said the cut -- OPEC's third this
year -- would shore up prices, which have been hammered by dismal
projections for the world economy, and bring them closer to
OPEC's favored level of US$25 for a basket of its crudes.

By 1025 GMT (5.25 Jakarta time), London benchmark Brent was up
33 cents to trade at $25.23 a barrel.

U.S. NYMEX too had risen 28 cents in Asian electronic dealings
to $26.59.

An OPEC source told Reuters that the cartel's Secretary
General Ali Rodriguez was drafting an agreement on a production
cut that would be announced later in the day. The cartel had
earlier been planning to meet in early August for a decision.

"It is likely to be announced later today," the source said
adding that OPEC ministers would sign off the agreement by
telephone.

He said all ministers were on board for an output cut of one
million barrels though some countries had earlier favored slicing
output by one and half million bpd.

"It's a million, that is what the number will be," a senior
OPEC delegate said. "We will also emphasis strongly the need for
adherence to official quotas."

Oil prices have slumped close to the bottom of OPEC's
preferred $22-$28 range for a basket of OPEC crudes following
worries about energy demand amid a slowdown in the United States
-- the world's largest energy consumer.

Today's announcement will mean OPEC will have slashed output
this year by a total of 13 percent, reducing output to 23.2
million bpd -- the lowest level in over two years.

Analysts said the cut would once again underscore OPEC's
determination to keep prices around the $25-mark.

"This cut is a recipe for very high prices in the fourth
quarter," said David Johnson at Chase JF in Hong Kong.

Analysts said that in the medium term, the market was still
concerned about future demand and any OPEC cut would not remove
that worry, though it would help in the short term.

"The market has had a bearish tone because of the demand side
of things. (OPEC's determination) could make it think twice but
demand will be the crucial issue," said Ali Tahghighi of
Barclay's Capital.

The most immediate rise is likely to be precipitated by
speculative funds rushing to cover earlier short positions, taken
as they bet on a fall in oil prices.

"I doubt there'll be any panic, more likely consistent buying
over and above what might be normal. That should also help to
support prices too," Johnson of Chase JF said.

But voices of doubt remain especially because the new curbs
will leave OPEC with massive spare capacity. Leakage from the
cartel is already put at a massive 800,000 bpd and traders said
cheating could escalate once prices start inching up again.

Some cheer for sellers of crude also came on Wednesday in the
form of a fall in crude and gasoline inventories in the United
States, even though stock levels there were still higher than
year-ago levels.