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OPEC Production Cuts

Keith Kohl

Written By Keith Kohl

Posted March 10, 2009

Every time I read about OPEC’s next cut I can’t help but think about oil prices falling $30 a barrel.

Can you blame me?

Although crude nearly broke $49 per barrel during trading yesterday morning, the idea of OPEC cutting production has lost some of its weight. Naturally, cutting output levels in the past was a sure sign prices would jump. Even a rumor of production cuts was enough to boost crude prices. That makes sense considering OPEC controls three-quarters of the world’s oil reserves and approximately one-third of the world’s consumption. One would assume this would give OPEC the leverage needed to influence prices.

Then again, does anyone else remember what happened the day after OPEC announced a drastic cut in production last year? Crude prices fell to fresh multi-year lows of $32 per barrel. The economic crisis was just too much for OPEC to rescue plummeting oil prices.

Can we really expect things to be any different this time around?

The OPEC Effect

3.4 million barrels down, 800,000 barrels left to go.

Since September, OPEC has planned to slash 4.2 million bbls/day off its production. And although the oil cartel still has to reduce output by another 800,000 bbls/day, the general consensus is that OPEC will make another cut at their March 15 meeting.

I think a cut right now is inevitable. Clearly OPEC is feeling the pain of lower oil prices. Earnings have fallen nearly 60% because of weak prices. Believe me, dear reader, $40/bbl oil is taking its toll. You can bet OPEC will try to push prices higher by taking more crude off the market. Reducing the supply glut in the markets will help stabilize prices.

Of course, the size of the cut is a different story. I’ve personally seen several numbers floating around, ranging from half a million barrels per day to under two million barrels per day. I’ve even seen several analysts calling for more than two million barrels per day.

It’s no secret that OPEC would like to see prices between $60-70 per barrel.

And I simply don’t see that happening unless they take more oil out of the market (at the very least). And unless crude prices move back above $60 per barrel, we’re going to be in a lot more trouble than we are right now…

Cheap Oil Threatens Future Investments

OPEC has repeatedly warned that low oil prices threaten the long term outlook in the oil market. This was reiterated late last week when OPEC’s Secretary-General insisted that OPEC members investing in the oil industry is not economically viable with lower oil prices.

Think about that for a minute.

For me, not a day goes by without coming across some new figure detailing the impact that lower prices are having on the industry. Whether it’s the declining number of rigs actively drilling in the U.S., or even a new set of projects being canceled or delayed.

Then again, there hasn’t been much good news regarding demand. World oil consumption is expected to drop by approximately one million barrels per day this year (according to the EIA, global demand is projected to rally in 2010 due to improving economic conditions).

Consumers want prices to stay around $40 per barrel, yet still want to see investment. The bad news is that $40 per barrel simply isn’t enough. Low prices might feel great right now at the pump, but failing to invest in the long term is going to be devastating.

Summer Expectations

Despite the long term uncertainty, crude prices have managed to move higher.

The rebound came after after an unexpected drop in inventory was reported. People were expecting a small build of one million barrels. Instead, the report showed a 750,000 barrel draw.

So where are prices headed from here?

Well, that entirely depends on whom you’re asking.

While crude moved higher late last week, T. Boone Pickens called for $75/bbl by the end of the year. He went even further, saying, "We’ll see $60 before it goes under $40."

I can’t help but agree that we’ll see $75 per barrel by 2010.

Before I start tossing out wild long term predictions, however, the real test will be with demand. The first thing that directly comes to mind is what the summer driving season will bring. Gasoline demand is actually on the rise, up approximately 2.2% compared to a year ago according to the EIA report last week.

I’m curious as to what your expecting to see this year? Will it be enough to pick up crude prices?

Domestic Bulls

The point is that demand will eventually come back. In fact, I have yet to meet a reader that is bearish in the long run. But knowing that demand will pick up isn’t enough. When oil was making its run to $150 per barrel, one of the most important questions was where we were getting our oil. People started realizing that importing 70% of our demand wasn’t exactly the best way to go.

Naturally, the best option to reducing our thirst for foreign oil is to develop our domestic sources. U.S. domestic production.

Unfortunately, U.S. production is still falling down the back side of Hubbert’s curve and the concept of lowering our dependence on foreign oil isn’t new. But although the U.S. has been hit hard by peak oil, you would be surprised to find that there are still a few places in the U.S. with a very bright future. And as we pull our economy out of this financial crisis we’ll be scrambling to develop those prospective areas first. Next week, I’ll show you which operators are going to take advanatage of that position.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

P.S. The way I see it, there are two types of investors during a financial crisis. Either you’re the kind that panics and loses your shirt, or you take advantage of the chaos and profit. I know most my readers have been making gains throughout the latest economic troubles, and it wouldn’t be fair if I didn’t offer my newer readers the same chance.

Our newest play in the Pure Energy Trader already has readers profiting in a big way off the rising price of oil. And we can’t wait to see the gains to come. If you’re interested in these kinds of profits, I suggest checking out the Pure Energy Trader for yourself.



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