Wednesday, December 03, 2008
Oil Prices Destined to Fall Further
| Wednesday, 03 December 2008 | |
| Oil's further fall below Saudi Arabia's "fair price" of $75 a barrel will increase pressure on OPEC to set aside any differences and cut supply further when it meets later this month. At present, the oil cartel seems to be divided, for one more time, and this is the main reason than no one can predict the exact volume of the daily cut of production. Cartel’s hawkish side, led by Iran and Venezuela, is pushing for a deeper cut when the Organization of the Petroleum Exporting Countries, which pumps 40 percent of the world's oil, meets on December 17 in Oran, Algeria. Both countries claim that the market is oversupplied by about 2 million barrels per day. Such an extended cut in daily production in the forthcoming meeting, with all major economies in recession, could have a severe impact on oil prices, but again for the short term. And this is a real threat for OPEC members, because if they manage to increase oil prices to the favored level of $75 per barrel –something that sounds quite difficult- and after a week or less oil prices collapse again, then oil producers will be unarmed to protect the price of their product. At the same time Saudi Oil Minister Ali al-Naimi, speaking for OPEC's top exporter, has yet to publicly back another output cut, leaving traders uncertain about Saudi oil policy. Other OPEC members such as Nigeria and Kuwait are supporting the Saudi view that $75 is fair to both producers and consumers. Analysts say a real or perceived disagreement over the need to enforce oil supply cuts or deepen them is likely to push prices further below that level in the run up to the group's meeting in Oran. "It is a very dangerous time for OPEC," said David Hufton at brokers PVM in a report. "OPEC's indecision has ensured that oil prices will start on the back foot and will struggle to avoid moving back below $50 a barrel and reactivating the downside targets toward $40." After OPEC ended its meeting in Cairo on Saturday, delegates said most members, including all Gulf producers, saw the need to chop another 1 to 1.5 million barrels per day (bpd) off output, adding to the total of 2 million bpd agreed since September. An important barometer of supply for the producer group is the number of days of demand represented by oil stocks held in OECD industrialized countries. Inventories stood at 2.65 billion barrels at the end of September, according to the International Energy Agency. Given OECD oil demand is 48 million bpd, stocks would need to fall by almost 150 million barrels to reach 52 days. That means that OPEC would reach its goal of 52 days far more quickly if it cut further in Algeria. Even if OPEC fully implemented its most recent cut of 1.5 million bpd, it would take months to remove the excess supply. |
