I bet that OPEC can’t…

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Oil_barrel "Crude-oil futures soared above $49 a barrel Thursday, propelled by sharp weakness in the dollar and expectations that the Organization of Petroleum Exporting Countries will deliver a significant production cut next week.

Crude for January delivery rose $4.46, or 10.2%, to end at $47.98 a barrel on the New York Mercantile Exchange.
Earlier, the contract hit an intraday high of $49.12 a barrel in electronic trading on Globex.
Other energy futures also rallied. January reformulated gasoline rose 11 cents, or 11%, to end at $1.08 a gallon and January heating oil gained 11 cents to finish at $1.51 a gallon."  Marketwatch
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Can OPEC decide on production cuts?  Sure.  Can the OPEC countries endure pain from loss of revenues brought on by demand destruction and lower prices?  Probably not.  Will the members cheat on their quotas trying to "make up" the lost revenue?  Probably.  Can OPEC discipline its members to ensure that they will not cheat on their production quotas?  Certainly not.
Translation – Crude prices will appear to stabilize and then begin to fall again,  pl 

http://www.marketwatch.com/news/story/crude-futures-soar-12-trade/story.aspx?guid=%7BC2D4E75E-3C68-4112-ACA7-08AFA18CA3FF%7D

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19 Responses to I bet that OPEC can’t…

  1. kvv says:

    I may be wrong about this, but I don’t think that OPEC has ever been able to enforce production quotas. One member or another always cheats, the others find out about the cheating pretty quickly and that’s that.

  2. par4 says:

    OPEC can try drinking the stuff afaic.

  3. Andy says:

    I commented in a recent post that the Economist Intelligence Unit predicted an average of $65/b next year. They’ve just revised that estimate significantly downward to $35/b. They’re predicting oil will drop to $25/b in the first quarter and rise through the rest of the year to $45/b in the fourth, with a lot of volatility on the way. In 2010 they’re predicting only an average of $50/b.
    If these prices prove to be accurate, the negative effects on oil-producing countries will be severe, particularly those already in dire straits like Iran.

  4. Mad Dogs says:

    On “I bet that OPEC can’t…” Pat, I’m with you 100%.
    The entire history of OPEC is rife with massive cheating on “production quotas”.
    As I’ve read recently (sorry, no linky), national budgets of OPEC members all exceed that which they can obtain by selling existing production under current oil price levels.
    Cutting production would therefore only worsen national deficits.
    And with worldwide financial institutions freezing credit on even the most credit-worthy, paying one’s bills is not getting easier if one reduces selling product.
    As to oil pricing, I’m totally unsure whether it will continue dropping or not.
    There is a small uptick in US gasoline consumption; evidently driven by lower gas prices, which might produce a short term price bump, but the increasing slowing of all nations’ econonmies as the global recession deepens would lend itself to a continued global decrease in gas consumption.
    Regardless, my money is tucked safely away under my mattress.
    And given how little that is, there’s still plenty of room for me. *g*

  5. J says:

    Colonel,
    It roughly costs the Saudis approx. 40 cents to bring one barrel to the surface. And at the height of the $147 per barrel lunacy, they were getting roughly $3 per barrel at their well heads.

  6. Ken Roberts says:

    It’s a small thing maybe, but that word “cheat” bothers me. Not conducive to international relations re a serious matter. Cannot we use another word, such as “overproduce”? And anyway, isn’t overproduction not a problem for a commodity which is desirable now, and going to be more costly if bought later? So why discourage overproduction by labelling it cheating?

  7. Patrick Lang says:

    Ken R.
    I don’t buy that business about the word “cheating.” If OPEC members agree to specific quotas and then surrepticiously violate them, then they are cheating.
    pl

  8. Stormcrow says:

    I expect you’ll be proven right about OPEC being unable to enforce policy among its members. The history of these efforts is one of frequent failures and few if any successes.
    Just as you were about the speculative bubble in oil futures, which has now clearly burst.
    Of course, I expect the long-term price to go up. But “long-term” here means decades, not months.
    This should be an object lesson to people who like to assume that one and only one root cause is responsible for the dynamics of an observable.

  9. J says:

    Colonel,
    What about address the vitals regarding the oil and if those nations that we import from ever decide to stop taking our money for whatever reasons, we as a nation are then in a pickle.
    We import 13 million barrels per day
    [http://tonto.eia.doe.gov/dnav/pet/pet_move_imp_dc_NUS-Z00_mbblpd_a.htm].
    We produce 5 million per day
    [http://tonto.eia.doe.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_a.htm].
    And we use 18 million per day.
    Our strategic reserves has 701 million barrels in storage
    [http://www.spr.doe.gov/dir/dir.html].
    When the imports of oil stop, we will have to draw down on the strategic reserve by 13 million barrels per day, and in 59 days we will run out of the oil ‘balance’. No oil means no fuel for cars or trucks or tractors. Everything except electricity and natural gas is transported by truck. No diesel means no products being shipped including food.
    NYC area and its supermarkets has about 3 days worth of food stocks. So when the oil stops, 3 days later the food runs out in NYC, what do you think will happen next?
    How soon do you think that those currently capped wells around the nation would be unplugged and started pumping their oil once again, to make up that 13 million difference?

  10. isl says:

    Complete agreement – I do not see OPEC cutting supply faster than demand.
    However, I think that the real question is how any country will weather the brewing economic storm, which is not one of low oil, but of a very bad recession (or worse). Will Iran do worse than Iceland, for example.

  11. eakens says:

    Recall that oil was all the way down to $8/bbl in the late nineties. Life went on in Iran and other oil producing countries.
    There will be pain for them, certainly, but the western world typically underestimates the amount of hardship which they will endure.

  12. Besides wishing that Daniel Yergin would issue a supplement to his Pulitzer Prize winner “The Prize” the discourse here is really fun. Hey, no one knows. A huge strike, perhaps in Brazil perhaps in N.Dakota might be of great interest but in the terms of a relatively short time several decades the petrolum age will mostly behind not in front. Enjoy while you can whatever the price. By the way what price would be necessary for the politicos and man/woman in their cars to wake up to current wastefulness. Be interesting to see a long term graphing of the most fuel consumption POV vis a vis the most economic. Perhaps meaningless but seems to me a possible barometer of self-discipline and discipline by society. Oh, another thing just give a flat sum to DOD each year for petroleum products and say to the Generals we are sorry but that is all you can get. Conduct ops accordingly. By the way is an all-nuclear large ship NAVY possible?

  13. otiwa ogede says:

    I think the Nigerian budget is based on oil being at $45…there is a lot of incentive this time round for OPEC members, and Russia to stick to a production cut. They do not have the option of issuing bonds and borrowing like the US has.
    Long term oil price to stabilise at $50pb, with steep production cuts from primarily Saudi and Russia, is still my opinion.
    Also with the Israeli and Iranian election cycles coming around look to heightened rhetoric and sabre-rattling to affect oil prices.

  14. Will says:

    i continue to be amazed how our Master of Spies (the Colonel), to whom all the U.S. military attaches worldwide reported, although he is flabbergasted why laymen are impressed by this little bit of information, out predicted the master economists including some notable Nobel Prize winners!
    I think this blog is kind of a replacement to his former activities, to pick our brains- we are his attaches reporting to him.
    As Yogi Berra said, you can observe a lot by just looking, or words to that effect. When everybody starts thinking and expecting things to go a certain direction, watch out for surprises!

  15. J says:

    Colonel,
    If such a situation ever arose where other nations stopped accepting our money for their oil, would ‘The Carter Doctrine’ then kick in do you think?
    http://en.wikipedia.org/wiki/Carter_Doctrine

  16. Ken Roberts says:

    Hypocrisy is the vaseline of social intercourse. It’s not “truth” I’m advocating, but rather prudent diction.
    If a guy is selling me something I want, eg a ticket scalper, it’s good policy not to call him by a coarse name – refer to him by a neutral word at best, eg ticket vendor.
    And that applies to foreign suppliers too, perhaps even more so since they may have sensitivities that we don’t fully comprehend. Respect in the eyes of their fellows, etc.

  17. zanzibar says:

    Goldman Sachs crack oil analyst Arjun Murti who forecast crude at $200/bbl now believes that it will be $45/bbl in 2009.
    How do these firms justify paying these guys the big bucks? Classic rear view mirror thinking.

  18. kvv says:

    Well, we’ll have a chance to see, won’t we. Cut out 2.5 mbd? I don’t think so.

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