Thursday, December 18, 2008

OPEC slashes output by 2.2 billion barrels per day

OPEC appeared desperate as it met recently, deciding to reduce its output by even greater numbers. It had already cut production by 1.7 billion barrels and now it needs even deeper cuts. Apparently, desperate times call for desperate measures and the oil producing companies do not like the 40 dollar price per barrel they are getting now.

From the WSJ:

The cuts by the 12-member Organization of Petroleum Exporting Countries, meant to be effective Jan. 1, are huge by OPEC standards and clearly intended to send a message. They would mark the swiftest reduction in the cartel's production since it began setting output quotas in 1982.

The new cut was 200,000 barrels a day more than expected, and two other big producers, Russia and Azerbaijan, said they may contribute an additional 600,000 barrels a day in cuts to show support. "We needed to do something big. Demand is falling fast," said Kuwait Oil Minister Mohammad Al Olaim.

But within minutes of the announcement, U.S. benchmark crude prices fell sharply. They ended up down 8.12%, or $3.54, to $40.06, on the New York Mercantile Exchange.

The plunge in oil prices is a rare dose of good news for the U.S., Japan and other struggling economies that rely heavily on oil imports. The sharp drop in oil prices amounts to the equivalent of a massive stimulus package for big consuming countries, worth hundreds of billions of dollars. That relief has taken some pressure off of airlines, shipping companies and commuters, and over time can pare the cost of goods ranging from car tires to children's toys. After soaring to more than $150 a barrel in intraday trading, oil prices have since plunged by more than $100 a barrel in just five months.

The extraordinary OPEC summit here on the shores of the Mediterranean reflected much of the grimness and tension now overshadowing the world economy. Delegates expressed astonishment at how deeply the economic slump has eaten into world-wide energy demand.

OPEC now satisfies around 40% of world oil needs, which stand just under 86 million barrels a day. OPEC officials acknowledge that Wednesday's agreed cuts probably won't reverse the fall in prices. A rebound may only happen, they say, when traders begin to see real declines in oil inventories and some hint that demand in consuming countries is beginning to pick up.

In a sign of the overall mood, Saudi Arabian oil minister Ali Naimi said he hoped the output cut would "bring the market into balance." But he acknowledged that the unprecedented move "may lead to higher prices or may not."

One thing is certain, oil prices will climb back up, and I sincerely hope the United States will be ready when it does.

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