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As we discussed last Friday, the recent drop in oil prices prompted OPEC to meet earlier than planned to discuss possible production cuts, and that is exactly what the group of oil producing countries has decided to do, with an announced 1.5 million barrel a day production cut.It should not come as too much of a surprise to hear about today's plans. Oil has been falling sharply over the past few months, with a $40 price jump in the last month alone. Over the summer we were talking about the record high oil prices, and it was only this past July when prices were nearing $150 a barrel. How times have changed.
Even with today's announcement, oil is down again, as the market continues to worry about a spreading global recession. Earlier in the session oil dropped as low as $61.00 a barrel, and is currently trading down $3.24 to $62.68.
It's tough to really say if OPEC is going to be able to force its producing nations to actually cut supplies by the amount it wants them to. Before today's cut, it was estimated that OPEC nations were already producing 300,000 barrels a day over the previous quota, so in order to get the production levels to the point where OPEC is desiring would mean an actual 1.8 million barrel a day cut. I think this is probably a bit unlikely. OPEC is not exactly known for being able to keep to its promises.
Whether or not today's announced cuts will be enough to bolster prices remains to be seen. In addition to today's cuts, the 13 nation organization also stated that if prices did not stabilize quickly that would be more than willing to jump back in and cut production even further.
But some are wondering if production cuts are the best avenue that OPEC could have taken to help turn things around for oil.
In reality, falling oil prices, could themselves be the catalyst that major economies need to help the situation start to rebound, and therefor increase oil demand, leading to higher oil prices. Douglas McIntyre wrote a really good article earlier today about the advantages that OPEC could have seen had they decided to not cut production at all. Of course OPEC has decided to try to boost prices with a cut, but as Mr. McIntyre noted, oil prices could have gotten a better boost with no cuts at all. It's a good read, and presents some great points.
Only time will tell how long it takes for the global economic climate to reverse itself. When it does, demand for oil will once again rise in the major oil consumers, America and China, and oil will naturally start to move higher. But as to when this is going to take place... well, your guess is as good as mine!
Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the online investment advisory service Investor's Observer.
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Reader Comments (Page 1 of 1)
10-24-2008 @ 2:55PM
JCH said...
There is a profound lack of understanding on this board as to how oil works.
Times have not changed one bit. You used to bitch about high oil. I used to tell you there was one way to bring it down: recession.
Are you enjoying it? Was it worth it? Lol.
Nothing has changed. There is enough oil to solidly meet demand in a recession. There is not anywhere close to enough oil to meet the demand of a healthy global economy.
Aggressively increasing oil prices will exist in a global-growth economy from here to the end of oil. People had better figure out a new way to fuel a growth economy because oil ain't gonna be it, not are its alternatives.