Wednesday, October 22, 2008

OPEC: To cheat or not to cheat....

The Organization of Petroleum Exporting Countries (OPEC) meets on Friday in Vienna. What are they fighting? An oil bear market, where prices fell to their lowest levels in over a year; the oil Czars are nervous.

From CNNMoney:
"When the Organization of Petroleum Exporting Countries meets at its Vienna headquarters on Friday it will be reminded of just how slippery oil prices can be, and how little control the cartel has over the price of oil.


Faced with a the possibility of a global recession and a sharp decline in energy demand, OPEC will discuss slashing oil production in an emergency meeting.

OPEC president Chakib Khelil, Algeria's oil minister, said there could be a "significant" reduction in the organization's daily output of 29 million barrels.

The organization considers the market to be oversupplied by two million barrels a day, but it has yet to agree on the size of the cut. This lack of agreement could hinder its efforts to control prices.

"Two million barrels a day is a very big number and it's not that easy to do," said Joseph Stanislaw, an energy expert and independent senior advisor at the consultancy Deloitte & Touche. "It's possible. It's doable. But the question is how long it takes them to agree."
And later in the article:
"Most [OPEC] members have planned massive infrastructure projects on the assumption that high oil prices will continue," wrote Anas Alhajji, chief economist for NGP Energy Capital Management, in an email to CNNMoney.com. "If they cut production in the current environment, revenues will decline and they might not be able to finish these projects."

One of OPEC's biggest hurdles as it tries to stem the fall in oil prices is getting all its members to agree to a plan and to stick to it, said Alhajji."
RW: Expect a production cut, but also expect member countries to cheat. With spending projects in the pipeline, there is a strong incentive - especially coming from the smaller countries - to raise production slightly and attempt to steal market share from the remaining OPEC countries.

Rebecca Wilder

3 comments:

  1. The long commodity/short USD trade is unwinding in all its own fury...and taking every other EM economy with it, it seems!

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  2. The Saudis will be the ones to control production, right? And, there is always cheating on production numbers among the members. News today is that Venezuela is having trouble in its electrical output. What will they do? The cash cow is going to dry up.

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  3. Rebecca,

    I love the title, but it's so true! Well by now we know OPEC cut 1.5 million barrels a day, 1.7% of the world's oil demand. And it only took them two hours to make up their minds!

    I think OPEC is stuck between a rock and a hard place. All these countries want to do is make money, they have billions invested in drilling projects. They want to pump less to make oil prices rise, but want to pump more to sell more oil. If they cheat and pump more, is there a market for it considering the slowdown in consumption?

    Is the US and other large oil-consuming countries realizing we can get by on less oil? Will this cut make any difference in price (oddly enough oil prices dropped this morning after the news was announced)? Since the cut won't take effect until Nov 1, I guess we'll have to wait and see.

    If we can be determined to continue to drive less, we may be in good shape.

    Tim

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