OPEC announced that it would cut production by 2.2 million barrels per day or 7%, in an effort to shore up the market. Is it working? We just need to look at the price of light sweet crude this morning, which is $33.06 -- down $3.00. Instead of raising the price of oil, it seems that the cuts have had little effect.

This is somewhat confusing, but there is a logical explanation. We have a glut of oil swishing all over the world. In fact, storage has become so tight that oil is now being stored in large tanker ships off shore. If we look at the forward contracts in light sweet crude we have what is call a contango. A contango is when the nearest contract is selling at a discount to more distant contracts. It translates into an excess of oil in the spot market. Until some of this excess oil is worked off the market, prices will tend to hover at these low levels.

OPEC cuts oil output. Price drops. Why? originally appeared on BloggingStocks on Fri, 19 Dec 2008 16:46:00 EST. Please see our terms for use of feeds.