OPEC Announces Production Cuts of 2.2 Million Barrels, Markets Fail to Respond
Dec 19th, 08
Crude oil prices fall again, hitting lows last seen in the summer of 2004, and continue to fall despite OPEC's announcement to cut an additional 2.2 million barrels per day beginning in 2009.
OPEC announced production cuts of 2.2 million barrels of oil per day, raising the total of overall supply cuts to 4.2 million barrels effective January 1st, 2009. Oil prices were seemingly unaffected by the OPEC announcement, as crude oil prices fell under $38 a barrel – the first since July 2004 – leaving many to speculate that the failing global economy will outpace any OPEC production cuts. OPEC noted this in their meeting as well, citing crude volumes that were in excess of actual demand, combined with the global economic downturn, has led to a “destruction of demand” resulting in “unprecedented downward pressures on prices”.
Many analysts believe that OPEC must firmly stand by their vows to tighten the supply if oil prices are to stabilize above the $40 a barrel mark. The unprecedented level of cuts should be enough to eventually turn the market around and stop the bleeding, but only if OPEC can adhere to their promised production cuts. As it stands, OPEC has only seen compliance levels of 65-70% on the earlier production cuts in September and October, which would be a strong reason why the markets have not responded to yesterday’s announcement.
The reason for non-compliance on production cuts is that many OPEC nations rely on oil revenues as a primary income, and now especially in the face of budget deficits and possible internal turmoil, will struggle to maintain vows to cut production. It will have to be viewed as a short-term setback for a long-term benefit. As OPEC’s largest producer, Saudia Arabia will see the brunt of the new cuts, reducing their supply by 1.3 million barrels per day to level out daily production at about 8 million barrels. Iran, as OPEC’s second biggest producer, would have to cut nearly half a million barrels, and Venezuela somewhere around 340,000 barrels per day. Both countries are under immense financial pressure as they require oil prices in higher levels in order to balance their budgets. But as both nations are notorious for not adhering to cuts in the past, it will only remain to be seen whether they can sustain the short term reduction in revenues.
The US Energy Department reported that petroleum supplies climbed for the 11th time in 12 weeks, increasing by over a half million barrels to reach 321 million barrels last week. Storage is so overfilled and prices have fallen so much that tankers are being rented, filled up and parked to wait for prices to rebound. There may have been some demand extinction, as a huge shift in consumer behaviors has been witnessed this year: with more people taking public transportation or carpooling, the increase of sales in fuel-efficient vehicles, and an overall lessening in demand for petroleum due to the economic downturn.
The January U.S. crude oil contract settled down $3.84 at $36.22 a barrel, after earlier hitting $35.98, the lowest price since June 2004. London Brent settled down $2.17 at $43.36 a barrel.