OPEC’s crude oil cuts utterly ineffective
Yesterday, crude oil futures prices closed at nearly a 17-month low. Bulls talking up an OPEC cut just couldn’t silence the drumbeat of falling demand growth and a sagging economy.
Light, sweet crude for December delivery settled down 93 cents, or 1.5%, at $63.22 a barrel on the New York Mercantile Exchange, the lowest settlement price since May 29, 2007. December Brent crude on the ICE futures exchange settled down 64 cents, or 1%, at $61.41 a barrel.
The price of crude oil will continue in a downward spiral based on expectations that worldwide demand growth will be drastically lower in 2009 as economies cool worldwide. It’s not that demand is shrinking. To the contrary, it demand for oil is still growing, simply not at the pace it has been for the last decade. While little new happened to deepen demand worries Monday, the market didn’t receive any signs that it had hit bottom, either.
OPEC Secretary General Abdalla Salem el-Badri said they could hold a second emergency meeting before its regular session in December, causing a brief and utterly unsustained rally. El-Badri raised the prospect of another crude oil production cut, on top of the 1.5 million barrels/day reduction announced Friday, at OPEC’s first emergency meeting.
The OPEC move only addresses supply. Supply is not the problem here, it’s demand. The funny thing is, the western world has already put the train on the rail toward energy diversification. OPEC’s disasterous policies in the 70’s haunted them in the 80’s and 90’s. Now, OPEC’s policies in the new millenium could prove to change the course of energy history forever, driving alternative fuels, domestic production and energy efficiency.
Now, OPEC thinks a supply move will solve their problem and bring prices to where they have been. They have been undone - demand rules, supply follows.
Market participants have also raised doubts that OPEC members will even comply with the ordered cuts. It seems that the members of the cartel have a problem with authority.
The U.S. is moving toward an oversupply of crude oil, with analysts anticipating a 1.6-million-barrel build in crude stocks in weekly data due Wednesday from the U.S. Energy Information Administration. Oil inventories are already above the five-year average, as refiners hold down runs in response to weak demand.
“Refiners aren’t in a real hurry to start making a lot of product that they’re not selling much of,” said Phil Flynn, an analyst with Alaron Trading Corp. “Crude oil should continue to build for a while.”
Analysts surveyed by Dow Jones also gave an average forecast of a 1.8-million-barrel build in gasoline inventories and a 500,000-barrel build in distillate stocks, which include heating oil and diesel.
Front-month November reformulated gasoline blendstock, or RBOB, settled 10 points, or 0.1%, lower at $1.4769 a gallon. November heating oil settled 3.21 cents, or 1.7%, lower at $1.9144 a gallon.
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