Monday, April 27, 2009

OPEC's Next Cut: Fake it?

OPEC members meet next on May 28, 2009. Although varied OPEC members create a lot of media noise, this is usually for consumption by their domestic news markets. OPEC decision making is effectively Saudi Arabian decision making. The Saudis speak softly but carry a big spigot.

Today's WTI price is around $50/bbl. Every day we spend below the Saudi's 2009 governement budget balancing number of around $60 per barrel the more likely an additional token cut of up to 1 million barrels per day will be announced with no intention of ever implimenting it.

Since Q4 2008, OPEC have taken more than enough oil (3.5 million barrels per day) from the market to clean up global inventories (2009 global demand is only expected to be down 1.5 to 2.5million barrels per day - my models are around the 1.75mark) and so this OPEC token cut would simply be to change sentiment.

The Wall Street Journal quoted my opinion a few days ago.

"If oil is not above $60 by May 28, OPEC will announce a one-million-barrel-a-day cut with no intention of implementing it," said Morgan Downey....."They're going to have to give the market a kick in the butt to get it positive again."

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