1. Collapsing prices
The week started with prices rising as the stock markets saw some improvement in inter-bank lending rates and the oil markets looked forward to an OPEC production cut on Friday. Oil climbed above $75 a barrel on Monday and Tuesday morning before the roof fell in. The reversal, caused by pessimistic earnings reports, sent the stock market tumbling and oil following right behind. By Wednesday afternoon, oil and stocks were in full retreat with oil falling $5.43 a barrel to close at $66.75 a barrel and the Dow falling 514 points.
The slide was helped by the weekly stocks report which showed crude increasing by 3.2 million barrels, gasoline by 2.7 million barrels and distillates by 2.2 million barrels. Oil consumption, however, rose by 1.7 percent last week helped by increased use of gasoline which is now down by only 4.3 percent over the same four weeks last year. Gasoline prices slipped by nearly 25 cents a gallon last week and are now only a few cents above where they were last year. Given that the shortages across the Southeast are nearly over and that gasoline prices continue to fall it is not surprising that US consumption is moving up again.
Lloyds reports that OPEC exports fell by 900,000 b/d in the four week ending October 5th. Most of the drop comes from the major Gulf producers indicating that supplies are already being reduced.
2. The OPEC meeting
This week’s price drop sets the stage for what may be the most pivotal OPEC meeting in years. If oil prices stay in the vicinity of Wednesday’s close, then OPEC will only be receiving on the order of $55 a barrel for its oil, below or close to the price the nearly all the members need to keep their spending at current levels. A production cut is obviously in order and, as usual, the question remains of how much, how it will be allocated, and will the more desperate members adhere to their quota.
Pre-meeting statements by various oil ministers mention a cut of anywhere from one to three million b/d. OPEC has already asked major non-member exporters such as Russia, Norway, and Mexico to join them in cutting production, but so far all have refused.
Many analysts are skeptical that a multi-million b/d reduction can actually be accomplished as OPEC members have a long history of ignoring quotas and pumping as much as they can sell. Although conventional wisdom says that demand for oil is falling rapidly, that may not necessarily be the case. Prices are back to last year’s levels, the drop in US consumption seems to be slowing, and China’s consumption is still increasing. Too much of a production cut could easily drive prices back to levels seen earlier this year, and exacerbate the world’s economic situation.
Several OPEC ministers have now mentioned a price of $70-90 a barrel as the proper level for stabilizing the market. Whether OPEC has the power to fine tune such a price level in the face of the most turbulent markets ever is yet to be seen. Many analysts expect that we will see a price jump next Monday after the OPEC decision but that oil prices will soon fall back to moving with the equity markets, the dollar, and the prospects for the economy.