This recession certainly has had its unique characteristics: the longest contraction (at least 18 months) since the end of World War II, the first U.S. median home price decline in at least 40 years, and OPEC production discipline.Amid slack demand and rising inventories, OPEC, excluding Iraq, cut production for the second consecutive month, decreasing average production by 10,000 barrels per day from August (bpd) to 26.045 million bpd, according to a survey of oil companies, producers and analysts, Bloomberg News reported Thursday.
OPEC members have already agreed to remove 4.2 million bpd in production since late 2008. Historically, cuts of the that magnitude would be interpreted as firming prices, and certainly having 4.2 million bpd less floating around in a market already awash in oil is not bearish for prices.
$70 oil: a high price for a recession
But oil's price during the recession, excluding the brief, leverage-bust plunge to about $35, has remained more than firm: at around $70 per barrel, oil has remained stubbornly high, despite low U.S. gasoline demand (due to near 10% U.S. unemployment) and slack demand in emerging markets. The aforementioned highlights how oil's price has become largely divorced from supply/demand fundamentals: oil's price is being boosted above where it would typically be during an oil glut, by the weak dollar, institutional investor buying of oil as an asset and as an inflation hedge, and by speculation.
Energy Analysis: In normal times, a $70 oil price during a recession would be unfathomable. But as most investors know, we are not in normal economic times. That suggests, given the role of the weak dollar in oil's price, cutting the U.S. budget deficit (which would strengthen the dollar), will play as large a role in putting a lid on oil prices as increased energy efficiency and oil production increases.
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