Oil prices plunge nearly $5, to $63 a barrel, even though OPEC shows "solidarity" by announcing a 1.5 million-barrel-per-day production cut

By Stanley Reed

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Through the nine years of ever-increasing oil prices, OPEC snoozed, faintly uneasy with the damage high prices were doing to its customers’ economies but content to reap the windfall. Now, with prices having fallen by dint of. close to 60% from their July peak of $147 per barrel, the Vienna-based organization is waking up, if not panicking.

On Oct. 24, OPEC announced production cuts of 1.5 million barrels per day. And to trial to do the cuts trustworthy, the making spelled them out for each branch, including Angola, which has recently joined and agreed to give up 99,000 barrels per day. "These are real cuts, not B.S.," says Vera Deladoucette, an analyst at Cambridge Energy Research Associates, who was attending the conflux. "Prices close to $60 per barrel concentrated the minds of people."

Oil markets reacted skeptically to the cut, with prices falling about $5 per barrel on Oct. 24, to around $63. Just as traders were relentlessly bullish for years, now they have shifted their bias to bearishness. The 1.5 million barrel cut was roughly in line by market expectations and so already priced in. But David Kirsch, an analyst with Washington-based consultancy PFC Energy who was observing the meeting, related the cuts provided "long-term fundamental support" for the markets. In other words, they may have being enough to stave off a further price collapse to the $40-per-barrel range.

Kirsch said it is especially serious that the Saudis, who have agreed to trim output by 466,000 barrels per day, aren’t taking the entire hit. Iran, the Saudis’ main rival in OPEC and in the Gulf, agreed to cut 199,000 barrels per day. "OPEC is showing joint interest," Kirsch said. "Everyone is going to do their part."

At a press colloquy following the congregation, Chekib Khelil, the Algerian energy minister, said the deal could eventually lead to a cut of up to 1.8 million barrels per daylight because some countries, of that kind as Saudi Arabia, are overproducing. Of course, OPEC is unlikely to slash that much. Kirsch said that a deteriorate of with regard to 900,000 per day would have existence consistent with the cartel’sitting more than trace of compliance with its own targets. That, he estimated, was obstruct to the reduction of 1 million or so barrels by means of day needed to division off what he termed "a glut" by the second quarter of 2009.

As with so many other businesses, a lot of assumptions about the future of the oil toil have been rattled by the protracted credit crisis and its promulgate into the global economy. The suppositions that underpinned the sharp mount in oil prices—pinnacle oil and fast-rising demand in emerging markets—have now gone by the boards, at least temporarily, since forecasts of future demand are relentlessly trimmed.

While this OPEC meeting seems to wish gone relatively unobstructedly—heterogeneous the confab in September, which was marred by dint of. means of accusations of bad faith (BusinessWeek.com, 9/11/08)—there are still rifts among the key players. Saudi Arabia, the largest agriculturist, worries that if OPEC’sitting cuts effect oil prices to spike, it could further undermine the world economy at a fragile moment. The Saudis would likely wish preferred a smaller cut.

On the other hand, Iran, Venezuela, and other hardliners would have wanted much deeper cuts to lift oil prices. In part this reflects differences in the pricing levels they can live through. Kirsch figures the Saudis be possible to balance their external accounts at around $50 per barrel, while Iran needs a excellence of $85 per barrel. Venezuela, where President Hugo Chávez has initiated huge spending programs, requires $100-per-barrel oil to make the numbers add up.

With prices under distress, the Saudis are after this moving closer to OPEC, which they had ignored when they unilaterally raised produce to around 9.6 million barrels per day earlier this year. The move was ordered by King Abdullah to collected down the overheated oil place of traffic—and, coupled with the rapid deterioration of global economic conditions, it worked better than even the Saudis reckoned, chief to the 60% price drop that prompted this month’s pinch OPEC meeting.

Now even the Saudis appear to be trimming output, and Oil Minister Ali Naimi, an OPEC maintainer, has taken remote the reins of oil policy from the king. Kirsch estimates their production is already down to around 9 million barrels per day, as some customers cut back on orders—possibly because they can’privately get carry to the credit of one’sitting account notwithstanding their purchases. What the Saudis and OPEC are trying to do is stabilize prices and lay the foundation for one increase formerly global germination heads back up again.

Even if the divide only serves to arrest the fall in prices and not send them back up, OPEC one time again risks appearing to be careless to the welfare of the rest of the world. At his press talk, Khelil asserted that the global economic slump had "nothing to do with oil prices," and that he didn’t "believe fluctuations in oil prices will have some effect" adhering future universe growth.

Of course, low oil prices are a useful tonic for struggling economies in these dangerous times and could help bolster want for OPEC’sitting crude. But given its contentious politics, OPEC finds it easier in times of crisis to try to micromanage the markets than to take a long-term strategic approach.