Oil Jumps on OPEC Output-Cut Plan

Updated from 2:10 p.m.

Crude prices jumped beyond $62 Thursday after the Organization of the Petroleum Exporting Countries agreed to trim production for the second time starting in February.

OPEC opted to slash daily output by 500,000 barrels, or about 2%, on Feb. 1 to prop up crude prices above $60. Over the past two months, prices have generally traded between $57 and $61 despite a previous announced reduction of 1.2 million barrels per day.

"We are committed to supplying the market, but we want to establish a balance between supply and demand," OPEC President Edmund Daukoru told ReutersThursday after the group's meeting in Nigeria.

Light, sweet crude added $1.14 to close at $62.51 a barrel on Nymex. Heating oil rose 4 cents to $1.77 a gallon and wholesale gasoline climbed by 4 cents to $1.67 a gallon.

The cut flew in the face of a warning from the International Energy Agency, a Paris-based energy advisory group, that OPEC's previous reduction was already driving up prices. An additional decrease would further increase prices and slow economic growth worldwide, the advisory group says.

In October, OPEC agreed to reduce output by 1.2 million barrels, or 4%, but prices refused to budge because many traders and analysts believed the cut was not uniform. The U.S. Energy Department even said in its monthly energy report that it forecast the group had only slashed output by 800,000 barrels since some members didn't want to lose their oil revenues.

Some of the confusion in the markets could be attributed to OPEC's lack of clarity. When the group agreed to the cut, it said the reduction would be from actual production levels, but never detailed what they were, writes James Williams, an energy analyst at WTRG Economics in London, Ark.

"OPEC did not formalize the previous cut and the additional reduction in February is likely to be 50% effective as well," Williams writes in a note to clients. "Members of cartels and cartel-like organizations have strong incentives to cheat and are more likely to do so in a high price environment."

A weak U.S. dollar also helped prompt OPEC to trim output. When the dollar is weak, OPEC makes less money because it prices crude in dollars. The dollar is currently trading at $1.31 per euro and is down about 12% vs. the currency year-to-date.

The cartel, which controls 40% of the world's crude, opted to trim output towards the end of the winter heating season in order to keep prices from skyrocketing.

In other news, OPEC will gain its first new member since 1975 beginning March 1 when Angola joins the 11-member countries. Angola currently produces about 1.4 million barrels a day, making it the ninth-biggest producer.

Brimming fuel supplies have also crimped the effect of OPEC's cut. Crude inventories are about 4% above last year's levels. Stockpiles of oil fell for the third week in a row in the U.S. Energy Department's weekly petroleum report released Wednesday. Lower imports and increased gasoline production shaved crude inventories by 4.3 million barrels last week.

Inventories of gasoline dipped by 100,000 barrels and distillates fell by 500,000 barrels thanks to higher demand. Distillates include fuels like heating oil, jet fuel and diesel.

Refineries, however, ran at slightly lower rates, down from 90.5% the previous week to 89.1% last week.

Warmer weather in the Northeast and forecasts for more mild weather this month shaved natural gas prices by 11 cents to $7.55 per million British thermal units. Last week, supplies dropped by 168 billion cubic feet to 3.23 trillion cubic feet on colder weather and higher demand for the heating fuel. Still, stockpiles are nearly 8% above the five-year average.

Energy stocks, meanwhile, were climbing 1.6% on the Amex Oil Index Thursday, with Occidental Petroleum(OXY Quote), ConocoPhillips(COP Quote) and Marathon Oil(MRO Quote) leading advancers, up from 3% to 4% each.

Exxon Mobil(XOM Quote), the biggest publicly traded energy company, was recently up 1.9% at $78.85.