Oil Prices: Cratering Demand Trumps Threats of More OPEC Cuts
If the oil market is a tug-of-war, the supply-side guys are being pulled face down into the mud.
Crude oil futures made a tepid run up toward $40 a barel on Wednesday as OPEC continued to talk about cutting production. But crude quickly sank below $37 when U.S. crude inventory numbers revealed an especially gloomy picture for oil demand. Crude stocks rose to 326 million barrels, and even stocks of refined products like heating oil rose sharply—in the middle of January, not a normal time to hoard heating oil, Bloomberg noted:
“When you get a 6 million-barrel build in distillate during the dead of winter, you are looking at a grim demand picture,” said John Kilduff, senior vice president of energy at MF Global Inc. in New York.
OPEC’s frantic efforts to curtail oil supply underscore how quickly global demand has evaporated. Venezuelan president Hugo Chavez said OPEC is “willing” to cut another 2 to 4 million barrels to shore up falling prices. To put that in perspective, OPEC’s total cuts since oil prices went south in late summer amount to 4.2 million barrels.
Saudi Arabia, OPEC’s biggest producer, isn’t even waiting for a new decision by the oil cartel. It said it would unilaterally reduce February oil production below its official quota of 8 million barrels per day, after already slashing production heavily to comply with a pair of OPEC cuts. That’s a sign that Saudi Arabia feels the need to take the lead in making big cuts in oil production, but it also exposes the country to backsliding by other OPEC members who historically have fudged their official output targets.
Oil bulls have maintained for months that the cuts OPEC has already made are enough to bring oil markets back into balance, likely in the second half of the year. If OPEC keeps cutting—and cutting massively—in a bid to turn around bear-minded oil markets, the first glimpse of global economic recovery might bring a quick and equally massive crude-price rebound.
Wow, a sensible article for a change.
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To compound the problem, most, if not all, non-OPEC new oil drilling projects are not economical with $37 oil. So, to compound the problem, when demand comes back, there will not be enough supply to meet it. Further, the supply that will be there, which will be short, will be higher than usual OPEC supply, which gives OPEC even greater control over prices.
Please get real, Get Real!
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OPEC have lost control on the low end, because they cannot cut production fast enough.
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On the high side, the events of summer would suggest that at high demand OPEC does not have enough supply to keep prices stable.
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So OPEC effectively have NO MORE CONTROL. Yippee!
They will never cut the production, They are just bluffing to help the oil prices stay inflated. Soon we will see oil below 30$. As far as OIL is concerned, daily movement of 5-10% can not be explained by just demand-supply mismatches, it is the traders who are moving the prices on rumors.
On the other hand, It’s very funny to see these guys worry about falling oil prices :), It made me very happy..
The new World order - Thank you Bush1
OPEC will keep cutting production to shore up the price of oil! Plus no one in their right mind would drill at $37 dollar oiul! It won’t pay out… and now that oil is cheap other energies wil cost to much, so we’re back to relying on oil!
The fall in the price of crude has nothing to do with Goldman and Morgan Stanley pulling billions out of the market? As soon as Goldman pulled out of crude trading the price plummeted.
We never had supply/demand imbalances we had a Goldman “expert” named Murti who had no clue what he was talking about and convinced himself and the gullible idiots on Wall Street that oil prices could only go up even as demand continued its decline for over a year in the US…which still represents over 25% of the world’s oil demand. Meanwhile companies who are actually involved in the oil industry kept to $40-$60/b forecasted short term prices even as crude prices exceeded $125/b.
The above posters disagreeing with me did not read carefully.
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I agree that Opec has lost control over pricing for now. However, after oil stops falling, many non-OPEC projects will be shut down because they are too expensive. Most OPEC oil is cheap to produce, so it will keep on producing.
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However, when demand comes back in the next year or two, OPEC will have a greater market share of oil because non-OPEC oil will not have been growing for 2 years. Thus, OPEC will have even greater control over prices because they control a great percent of world production. OPEC has great control over prices when demand is high because they can restrict production. As we are seeing now, they do not have much control when demand plumments.
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In summary, we are setting up for a huge energy spike once the world economies come back.
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Hope this helps.
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