The OPEC decision
After weeks of buildup the OPEC meeting in Oran finished with a surprise and an anticlimax. The surprise came in the form of an extra 200,000 b/d production cut tacked on at the last minute, bringing the total cut to 2.2 million b/d. The anticlimax came when oil prices immediately dropped 8.2 percent to close at $40.06 after the decision was announced. OPEC production cuts in the last four months are now over 4 million b/d without having much observable impact on prices.
A minor surprise or two came when Russia and Azerbaijan announced that they may cut an additional 600,000 b/d — but not right away. The high-level delegation that Moscow sent to the meeting, coupled with various hints about joining OPEC or at least coordinating price cuts, did not pan out in the end. The Russians made much of having already cut production by 320,000 b/d last month, but this was dismissed by most observers as a result of declining production or an inability to sell the oil.
The most surprising part of the Azeri announcement that they are considering cutting production by 300,000 b/d was that they had not consulted with the BP-led consortium that actually produces and sells the oil beforehand.
The markets’ reaction to the decision suggests that production continues to fall faster than is generally thought and that skepticism about whether the cuts will be made continues. The US crude inventory continues to increase and the international oil companies recently booked 25 supertankers capable of storing 50 million barrels of oil as floating storage. US demand for petroleum products continues to run about 1.2 million b/d lower than last year. Chinese demand in November was down about 3.5 percent over last year, the first drop in consumption in nearly 3 years. While it will be several months before we can judge the effectiveness of the new cut, suggestions that it will take cuts totaling 6 or 7 million b/d to rebalance the oil market may not be far off the mark.
IEA says 2020
Fatih Birol, chief economist to the International Energy Agency, told the UK’s Guardian newspaper that conventional crude output could plateau in 2020 due a lack of investment caused by the credit crunch.
The Detroit saga
The clock continues to run down on the US auto industry as the administration struggles with details of the loans it has promised to GM and Chrysler. Both firms say they do not have enough cash to operate more than a few weeks. Chrysler will shut down all production for a month on Friday and GM has halted work on the factory that will build the engine for its new electric car.
President Bush said on Wednesday that any form of bankruptcy would seriously harm the economy but he does not want to throw good money after bad. The President is weighing the many options tied to the loans and says he will decide soon.