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OPEC And Falling Prices: Is $25 Oil Next?

The Fed cuts dramatically slashes interest rates in an extraordinary move. Tomorrow OPEC is expected to cut oil output by more than we've seen in recent memory. The oil market seems to have shrugged off these potentially bullish developments because if people don't need oil, don't want oil and aren't using oil, lowering interest rates and reducing oil supplies won't matter as much.

China reported the first monthly decline in oil demand in nearly three years in November and refinery runs saw the biggest pull back in 5 1/2 years. China's oil demand was down 3.5% last month compared to a year ago.

Here at home, consumers are pumping less gas even with pump prices under $2 a gallon. Retail gasoline demand in the U.S. fell 5.4% last week, compared to the same time frame a year ago, according to the weekly survey by SpendingPulse by MasterCard Advisors. Meanwhile gas prices have plunged nearly $2.50/gallon from this summer's high to $1.66/gallon. Refineries are reducing runs since they're not making any money processing gasoline. Valero has reduced its US catcracking to 70% system wide based on poor gasoline economics. Demand is down and it's leading the free fall.

So while OPEC members have told us to expect a "severe" production cut tomorrow and its defacto leader Saudi oil minister Al-Naimi tells us it will probably be "about 2 million barrels a day", traders don't think that's enough to boost prices. In fact, a 2-million- barrel-per-day cut will bring OPEC's production quota to about 25.3 million barrels a day, that's about what OPEC was producing back in September 2003. Back then, the price of a barrel of crude was around $30 -- and demand was on the rise.

Remember oil prices fell 25% in the week after the Nov. 29 sideline meeting OPEC members held in Cairowhere they decided not to really do anything and the market had been waiting for some kind of announcement. That took prices from $56 to $40/barrel.

So what's next? $25 oil? If OPEC supply cuts are not sufficient and Chinese demand slows even further, Merrill Lynch's chief commodities strategist Francisco Blanch says it's definitely possible.

    • OPEC to Reveal Output Cut of 2 Million bpd: Poll

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