OPEC CUTS OUTPUT BY 1.5 MILLION BARRELS/DAY
PRODUCERS NO LONGER ENJOY THE POWER TO CONTROL PRICES
SHABBIR H. KAZMI
Oct 27 - Nov 02, 2008
An OPEC attempt to halt the free-fall fizzled Friday with crude plunging to lows last seen 15 months ago on almost all the economies facing recession this was despite the 13-member group's decision to slash production by 1.5 million barrels a day.
This reflected OPEC's diminishing control over prices. The language of an OPEC statement announcing the cut reflected how seriously it viewed the erosion of its revenues, as did the unusually short deliberations leading to the decision.
Oil prices have witnessed a dramatic collapse, unprecedented in speed and magnitude. This slowdown in demand is serving to exacerbate the situation in a market which has been oversupplied with crude for some time. It also warned of further hard times ahead for suppliers as the fall in demand will deepen in the coming months.
Historically, any move by the Organization of Petroleum Exporting Countries to reduce output led to an upward spike on fears that demand would outstrip supply. But Friday's oil market reaction reflected present realities; with the financial crisis pushing the US and other economies into recession, and even China's and India's booming economies slowing, even less oil at lower prices will have trouble finding a buyer.
The power to influence oil prices is moving farther and farther away from OPEC. Everyone thought China and India would go on buying oil forever, but that's not the case. The demand is no longer there. It is proving incorrect that emerging markets could weather a US downturn.
Steeply dropping world stock markets that reflected fear of a global recession proved the dominant influence on oil markets, sidelining any OPEC hopes that its steepest output cut in five years would remedy crude's plunge.
Major European bourses were down during the day but improved by closing time, still suffering losses as high as 5 per cent. Asian stocks also closed sharply down. Russia's two exchanges were shut down early because of double-digit losses and officials said they wouldn't resume trading until Tuesday.
On Wall Street, the Dow Jones industrials were down 400 points well into the trading day. Benchmark crude futures were trading at US$64.60 a barrel on the New York Mercantile Exchange after falling as low as US$62.85 earlier in the day, shortly after OPEC announced its cut, to take effect starting next month.
In terms of overall use, the latest weekly report from the US Department of Energy shows that crude demand has fallen in 38 of the past 42 weeks. US demand is down nearly 10 percent during the last four weeks YoY. The figures are significant because the US still consumes one out of every four barrels of oil produced.
The 11 OPEC nations under quotas are already producing more than their allocations, overall output from them is about 300,000 barrels a day more than the over all quota of about 29 million barrels. So if they stop overproduction, and comply with the 1.5 million cut agreed on Friday, OPEC should end up producing about 1.8 million barrels less a day.
But against increasingly alarming economic developments not only in America but in most corners of the world, even an OPEC cut closer to 2 million barrels a day is unlikely to turn near-term prices around.
The cut reflected a compromise between OPEC members such as Iran and Venezuela, which were pleading to up to 2 million barrels a day cut and the largest oil producers from the Middle East that are more open to US appeals for plentiful crude on the market.
The US criticized the move saying that the prices of all the commodities, including oil, should be determined in open, competitive markets, and not by anti-market production decisions. The high oil prices from the past year contributed to the slowdown in demand and the subsequent downturn in the economy.
OPEC officials left no doubt that they were ready to slice deeper quickly if Friday's decision does not end the price free fall. Friday's meeting was called unexpectedly in response to prices that have entered a tailspin since their historic high of nearly US$150 in July. OPEC President Chakib Khelil said OPEC was ready to convene another emergency session before its next planned gathering in December in Algeria if further decisions have to be made due to declining prices.
It's clear that the OPEC is attempting to hold oil prices around US$60 a barrel but where the market settles remains open. In an appeal to Russia and other major oil exporters outside OPEC, the oil ministers meeting in Vienna indirectly urged them not to undercut their efforts to prop up prices.
OPEC's move was predicated by a need not to raise prices but to save it from freefall. Iran, Venezuela and other OPEC members have suggested that, for them, selling oil under US$80 was a loss-maker, and Iraq said it would have to rethink next year's national budget if prices remain under that level.
Recently the British Prime Minister Gordon Brown said that OPEC production cuts would be "absolutely scandalous." In the United States, both candidates for the presidency have campaigned on the need to reduce reliance on imported oil from unfriendly producers in the Middle East.
The speed of the price slide after touching a record high of $147 in early July to current levels had left oil ministers deeply concerned about their countries' own finances and the prospect for even lower prices as the global economy slumps.
OPEC accounts for about 40 per cent of global oil production and could not take care of the worsening global financial crisis. Therefore, OPEC should not be expected to solve the world's financial crisis the organization did not cause and could not cure. OPEC cannot bail out the ailing economies plunging into problems due to their own mistakes, oversights and adventurism.