Opec Cuts Oil Production And Price Falls!

Opec voted to cut production by over 2 million barrels per day, and the price of crude was down over 5% Wednesday and over 15% in the past week. This seems hard to understand unless production is still well over current and near term demand.  Well, this may be the case according to Verleger (Oil analyst):

In his widely-read weekly analysis, “Notes at the Margin”, energy economist [Philip] Verleger suggests that OPEC should cut production by an “astounding 7.7 million barrels per day” just to restore market balance today.

Here’s why, according to Verleger, from Naked Capitalism:

-Global demand is down in December year-over-year by 5.2 million b/d to 81.6 million b/d, from 86.8 million b/d.

-Non-OPEC production is projected at 49.4 million b/d, with OPEC NGLs at 5.2 million b/d, and processing gain at 2.3 million b/d.

Verleger says that after adding those numbers, the call on OPEC is at 23.7 million b/d. By contrast, Platts’ estimate of OPEC production in October was 32.26 million b/d, before its recent cut of 1.5 million b/d reached at a meeting in November. A call of 23.7 million b/d would stand in stark contrast to the IEA’s estimate of a fourth quarter call of 31.1 million b/d and a full 2009 average of 30.4 million b/d.

“The implication, then is that OPEC countries need to reduce quotas not by one million or two million barrels per day, but rather by six or seven million barrels,” Verleger says in his report. “Since cuts of such magnitude are out of the question, one should expect prices to come under further downward pressure.”….

So, we could see oil at $20-$25 dollars per barrel…this will certainly crimp the building boom in Dubai….Russia is going into recession…these are not good effects, but it will also reduce the largesse handed out to “charities” by the Saudis.

Why am I grinning?

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