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OPEC Attempts Shock Therapy for Declining Demand
added: 2008-12-19

The Abraham Energy Report issued a special analysis to subscribers of OPEC's decision Wednesday to cut production by 4.2 million barrels per day.

A special Web-only bulletin from the Abraham Energy Report ( advises subscribers that "the cut is the largest the organization has attempted at one time in its history to date" and that the "agreement was swift with little apparent dissention."

The recent collapse in oil prices by almost $100 per barrel is a symptom of the slowing economy. "Global oil demand is now certain to shrink in 2008 for the first time in 25 years, and a consensus is developing around the notion that demand will fall next year as well," the Report said.

The Report also noted OPEC had to take action. "After some months of relative inaction, OPEC now appears to be racing ahead once again in an attempt to catch up with a declining market. But bringing supply and demand into better balance next year will still prove to be tricky, especially in the first half of 2009 when demand could be its weakest. In addition to the uncertain global economic outlook, the big wild cards in this deck now appear to be the size of the growing inventory overhang, the degree of OPEC compliance with the agreed cuts, and the uncertain outlook for non-OPEC supplies."

The Report also discussed the question of compliance by OPEC members. "If the latest round of cuts succeeds in shocking the market and nudging prices upward, revenues will improve and possibly make compliance an easier pill to swallow. On the other hand, higher prices could prove to be a strong temptation to produce more, and lead to quota busting. This will be especially true for Venezuela, Iran, Nigeria and Ecuador, as well as Russia, who are all facing difficult political choices at home.

"As a result, it's possible that we could see a considerable amount of seesawing in prices and OPEC output over the course of next year. OPEC also has to be wary of the world's fragile economic condition. Some in OPEC view the drop in oil prices as their contribution to economic recovery, and some may be better prepared and able to live with relatively low prices for a year or two.

"OPEC may have some limited success in preventing prices from falling much further, but it seems doubtful that they will succeed in raising prices to $75 per barrel anytime soon. Sustained higher prices may only be possible when the global economy shows definite signs of recovery and renewed growth," the Report concludes.

Source: PR Newswire

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