OPEC cut production by 9% last week, and has pared production by more than 4 million barrels per day (bpd) this year, but even those large supply cuts may not be able to create a bottom in oil's price. Incredibly, more production cuts may be needed, so say economists. The modifier 'incredibly' is used to describe current conditions in the oil market because less than one year ago the talk was of spot shortages, out-of-control commodity prices due to emerging market demand, and visions of $200 crude.
However, the U.S. economy fell into a recession in late 2007, intensifying the ripple effects of the financial crisis, which pushed the global economy into a recession this year, and the oil market not only just cooled, it collapsed. Oil Friday closed down $2.35 to $33.87 per barrel. Oil has fallen an unthinkable, mind-boggling 77% since hitting an all-time high of $147.27 per barrel in the summer.
Possible 'nightmare' oil producers' scenario
Further, a bottom for oil prices is nowhere in sight, so says economist Peter Dawson. Oil will test $30 per barrel very soon, he said, due to declining U.S. gasoline and oil consumption, and slowing oil consumption growth around the world.
"The International Energy Agency's projection that global oil demand in 2008 will fall by 200,000 bpd to 85.8 million bpd is the telling stat," Dawson said. "Inventories are building and will continue to do so because too many suppliers are producing too much oil. So long as that remains the case, there is no bottom in sight for oil."
What's more, there's not likely to be an uptick in demand in 2009, given the likelihood that the U.S. and global economies will remain in recessions for most of the new year. That reality, combined with the fact many oil producers are state-owned, and hence must pump oil to generate revenue to pay for government spending, sets up "a potential nightmare scenario for oil producers," Dawson said.
"We're running out of places to store crude oil. We're already storing oil in large oil tanker ships. OPEC's cuts will not be enough to stem rising inventories," Dawson said. "Non-OPEC producers have to cut production as well. Oil producers haven't fully grasped this yet. But many will argue they have no choice but to produce to fund government budgets. But if they don't cut, a complete collapse in oil's price, beyond what we've already seen, could occur."
Oil Analysis: It has been an historic turn of events in the oil market. The only comparable period would be 1997-1998, when an oil glut and an Asian financial crisis drove oil below $15 per barrel (and gasoline below $1 per gallon). Further, those investors in oil-based stock plays counting on a rebound in prices in 2009 should heed the IEA's analysis: given economic conditions, that rebound is not likely in the first half of 2009.
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Reader Comments (Page 1 of 1)
12-22-2008 @ 1:02PM
Iridium said...
If anyone in the oil industry wants to complain about oil at $30 a barrel I would like to take them and drown them in thier own product.
$30 a barrel is profitable by a large margin. Sure it doesn't bring the insane profits of $100 per barrel but $30 is a fantastic price for a global recession.
If we didn't have this total BS hedge binge that drove the price sky high, oil would most likely be at $12 a barrel right now.
If any oil executive or oil shiek comes out and complains that they are losing money, they should be shot. No more mercy. You made billions with oil at $25 a barrel. At $40 you were saying that you could drill on the bottom of the ocean and make money. SO don't go off and say that your company is going to be screwed at $30.
Drill for oil and sell it at a demand based price. If you want to sell it based on a exchange board inflated price. Well then go build your own country and do whatever you want to the people that will never move there.
12-22-2008 @ 5:59PM
shawn said...
Being one that worked in oil business for 20 years, Iridium is correct. Break even at $15.00 to $18.00 a barrel. A profit is made at $20.00 a barrel, at $25.00 they are hiring and buying art work for the offices. At $30.00 they are throwing money away and buying new jets and exec's flying on company dime to Europe or even Colorado to ski. It is ridiculous to try to get the public to think that at $30.00 they are in a dire way. Something needs to be done about the hedgers. Its been like a raise in pay lately. Instead of $50.00 on todays fill up, it cost only $20.00, that $30.00 goes along way on Christmas. Drill Here Drill Now. O no--good times almost over!!
12-22-2008 @ 9:34PM
Mike said...
CORRECTION: the oil didn't close on Friday at $32 per barrel, it was $42. (We have yet to see oil in the lower $30s, at least within the last 4 years or so.)
1-29-2009 @ 3:37PM
daang7601 said...
Tell OPEC to STOP supplying us any more of their BLOODY oil... That way these camels don't have to worry of cutting little by little.
America can survive without it; the Americans are innovative and are prepared and are ADAPTABLE without OPEC's oil... So, OPEC STOP sending us anymore of your bloody oil... I stopped buying gasoline and any crude products...
I got rid of all my gasoline fueled vehicles and tools... No longer need them... I have solarized my home, so no more electric bills...