"Will they cut production or not?"
I used to always ask myself this question before an upcoming OPEC meeting. Naturally, it was a much different situation back then. Oil prices were climbing well over $100 per barrel.
The OPEC hawks were constantly unsatisfied with prices at the time. If oil was trading at $75 per barrel, it wasn’t enough. When prices jumped over $100 per barrel for the first time, I remember hearing them calling for more cuts.
Even on the other hand, you could see the large producers were changing their opinions. Saudi Arabia used to be comfortable with a barrel of oil costing $60. Soon their comfort level rose above $100 per barrel.
Yet ever since oil’s fall from $150 per barrel in July, OPEC hasn’t been able to defend oil prices. At the end of last week, the OPEC basket of thirteen crudes fell below $40 a barrel.
Like I said, things are much different this time around.
OPEC’s Next Meeting
The question now is, "How much will they cut?"
In two days, OPEC is drawing a line in the sand. On Wednesday’s meeting, OPEC will formally announce how much its members will lower production.
The general prediction so far is that OPEC will lower oil production by at least 2 million barrels per day. That comes out to a drop of approximately 7.3%. According to the organization, the oil markets are oversupplied by about 100 million barrels.
As you know, OPEC controls nearly 40% of the world’s crude supply. Last month, the oil cartel pumped a little more than 31 million barrels of oil per day. When the Saudis start looking to cut production, you can bet the rest will follow suit.
But will their inevitable production cut re-establish OPEC’s control over oil prices?
I wouldn’t hold your breath.
Unless the cuts are drastically higher than announced (at least double the predicted amount), I don’t see oil prices climbing out of the gutter just yet. And so far, the threat of a cut has not had much of an effect. Right now, oil is trading under $45 per barrel.
Russia Debates an OPEC Future
In order to help bring prices back under control, OPEC has turned to one of the world’s top energy producers.
The group is asking Russia to cut production between 200,000 and 300,000 barrels per day. Although Russia hasn’t made a decision on joining the 13-member OPEC, they are sending a delegation to the meeting in Oran, Algeria on Wednesday.
Honestly, I don’t think it really matters if OPEC asks them to cut production.
Right now, Russia produces about 9.8 million barrels of oil. Regardless of what they decide, that production level is going to drop in 2009. Oil prices have dropped 70% over the last five months. Lower prices are forcing Russia to cut investment and even delay future projects.
Crisis Breeds Opportunity
I’ll admit, I’ve never had much faith in OPEC’s production levels. OPEC’s reserves are suspicious enough. Then again, I wouldn’t put my money in their aging fields even if they begged for it.
Just watching Cantarell’s failing production gives me chills about our future oil supply. Trust me, dear reader, OPEC isn’t faring much better. One of the reasons why OPEC price hawks are so determined to cut production is because those countries wouldn’t be able to raise output levels in the first place!
But let’s not focus on the doom and gloom, because oil around $40 per barrel gives us a perfect buying opportunity. Investing in our future oil supply has never been easier. Where should you be looking?
To answer that question, all you need to do is take a step back and look at the situation. Let’s face it, the cheap and easy-to-get oil is nearly gone. Over the next decade, our oil is going to come from those unconventional and offshore deposits. Once this recession is behind us (and we will come out of it eventually) there’s going to be trillions of dollars poured into the energy infrastructure.
That’s not wishful thinking, it’s a fact.
Until next time,
P.S. Like many of you, I’m not frustrated during a recession. The reason is simple. Can you honestly think of a better buying opportunity? However, finding those oil and gas gems can be extremely difficult. Most of my readers are on the verge of picking up another bargain, perhaps it’s time you joined them. Click here to learn more about the $20 Trillion Report.