Why is OPEC expecting a sharp drop in oil prices? First, much of the rise in oil prices has followed the rally on Wall Street. Investors reasoned that higher stock prices means that business is doing better and hence a need for more oil, and prices rise.

Not so fast. Business demand for oil is weak, and the consumer got clobbered by the recession and is holding back spending money. So the classic relationship between the stock market and oil that investors follow is not there this year.

Put yourself in the shoes of the OPEC ministers meeting this weekend in Geneva. They will be sitting down and discussing the current supply/demand for oil in the coming months. The world is in crisis and OPEC has cut oil production several times over the past year. Now they must decide again what to do.

Here are some cold facts. OPEC expects oil demand to fall by 1 million barrels per day in 2009. That in itself is not so unusual, but now look at the one. Demand growth from developing countries is shrinking by 80% compared with last year. There is a glut of oil in storage and in tankers around the world, with estimates of a 57-day supply. This excess supply is unusually high by OPEC's standards.

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.