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.