OPEC to Bail Out Oil?

Oil traders are nervously keeping an ear to the ground for the latest word from OPEC. The price of oil rebounded from a 16-month low on the prospect of a cut in production by the oil cartel.

Iran and Venezuela on Thursday urged OPEC to quickly slash output and stem a steep slide in prices that has left crude at its cheapest in 15 months -- and some member countries scrambling to balance their books.

“The outcome of Friday’s meeting in Vienna is likely to be an announcement of an immediate production cut of 1.5M bbls/d, with an option to cut by another 500,000 bbls/d at or before the scheduled meeting of the cartel in December,” explains, Addison Armstrong direction of research for Tradition Energy.

But OPEC's power to raise prices by cutting supply may be fading amid a global economic crisis that has evaporated demand for oil.

The latest weekly report from the U.S. Department of Energy shows that demand has fallen in 38 of the past 42 weeks. U.S. demand is down nearly 10 percent during the past four weeks year on year. The U.S. still consumes one out of every four barrels of oil produced.

“OPEC faces a great challenge here,” says Armstrong. “Cut too much and they risk spiking prices that would help to prolong the global recession; but if they don't cut they risk a supply glut in the second quarter of 2009 that could further depress prices.”

"This is not a supply issue," adds trader and analyst Stephen Schork. "OPEC can affect supply but they can't touch the demand side, which right now is a house of cards."

OPEC might take another tack entirely. The OPEC president said earlier this week that non-OPEC producers should join with the cartel to close the spigots.

However, Addison Armstrong tells us such a move is highly unlikely.


“Russia already has falling production due to poor infrastructure, a problem the government is trying to correct by providing tax-breaks to oil companies there. The credit crunch is also making it very difficult for producers around the globe to fund operations right now, a problem made more acute in Russia due to the vastly reduced market capitalization of its leading energy companies.”


“Norway will find it politically difficult, as a European company, to be advocating higher prices just as its Continental neighbors are falling in to recession.


Finally, Mexico is beset by its own problems, chiefly that production there has already fallen to its lowest level since 1995 and oil export revenue has become more important as exports from other Mexican industries have slowed.

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