Fausta's Blog

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October 24, 2008 By Fausta

OPEC cuts production, prices fall, Hugo sweats some more

WSJ Blog: Oil Ink: OPEC Slashes Output, Crude Price Falls

OPEC did exactly what it promised in Vienna, slashing oil output by 1.5 million barrels a day, but the market shrugged off the cartel’s biggest production cut in nearly two years and crude futures fell to $63 in New York.

BBC: The cut will take effect from 1 November.

Bloomberg: OPEC Agrees to Cut Production Quotas as Price Slumps

OPEC decided to lower supply by 1.5 million barrels a day from November, oil ministers said today at the end of a meeting at the group’s Vienna’s headquarters. The reduction will be from the existing quota for 11 members of 28.8 million barrels a day.
…
OPEC President and Algerian Oil Minister Chakib Khelil said at a news conference that the cut will be “100 percent effective” in stabilizing prices.

Apparently Khelil didn’t talk to the Qatari Oil Minister Abdullah bin Hamad al- Attiyah, who said,

Another cut in December is “possible,” depending on how the oil market reacts

Venezuela has been insisting that OPEC establish a target price range of $80 – $100/barrel. Iran, Venezuela and Libya are panicking, according to the NYT.

All this points to serious splits between OPEC members,

Their disagreements — both publicly and privately — may set the stage for a more contentious chapter in the organization’s history that could also mean a period of lower oil prices as producers fight over what course to take.

“OPEC member countries’ national interests are greatly misaligned,” said Antoine Halff, an oil analyst at Newedge, a brokerage firm. “Falling prices will deepen, not lessen, those divisions.”

Because the growth in global oil demand has slowed sharply in recent months, OPEC fears the world will face a huge oversupply next year. Some members, led by Iran, pushed for an aggressive cut in production. Their aim is to stop the precipitous slide in prices that risks putting a big dent in their government revenues and jeopardizes their increasingly large social spending programs.

Allies of the United States within the group, led by Saudi Arabia, have pledged to keep oil markets well supplied, as industrialized nations grapple with the worst economic crisis in decades. They have repeatedly said they do not want to add to the world’s economic woes by pushing up oil prices. After he arrived in Vienna, Mr. Naimi, the Saudi oil minister, said that oil prices should be determined by the market.

Here in the US, gasoline retail sales fell by 8 percent last week.

The Washington Post quotes Venezuelan Oil Minister Rafael Ramirez’s admission that “Demand is collapsing.”

Chavez’s attempts to turn OPEC into an overtly politically militant group have failed so far. Venezuela’s oil production has dropped by 25% since Chavez came to power. One of my commenters mentioned that Venezuela’s oil is high in sulfur and sells for less than the world oil price – this means Chavez is getting now $100 less per barrel than he was a few months ago. With the price of oil dropping, his Bolivarian empire dreams are a chimera; if oil stays low, he’ll be gone, too.

(Regular readers of this blog know that I have stated that if oil stays below $80 for an extended period of time, Chavez will be looking at real estate in a retirement community near Cannes.)

As of the writing of this post, oil is trading at $63.30

UPDATE
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Filed Under: business, economics, economy, Hugo Chavez, oil, OPEC, Venezuela Tagged With: Fausta's blog

Comments

  1. Gringo says

    October 24, 2008 at 9:25 am

    Here is some info on the Venezuelan oil price, courtesy of Devil’s Excrement.
    http://blogs.salon.com/0001330/2008/10/21.html#a4102

  2. Cris Cohen says

    October 24, 2008 at 10:28 am

    One OPEC spokesman was quoted as saying, “We hope this will help people stop throwing money away on things like food and medicine.”

  3. plainslow says

    October 24, 2008 at 10:29 am

    You say Hugo needs $80.00. Is that at 1.5 million barrels? Now that he has to cut back 129,000 per Opec, does he need have, say $90.00 a barrel, fo that lesser amount?

  4. Rachel says

    October 24, 2008 at 11:07 am

    woo hoo. If this keeps up the next Pres will see the same collapsing gas prices we saw in the Reagan years. The question will be if we all will be employed enough to enjoy it.

  5. JorgXMcKie says

    October 24, 2008 at 11:20 am

    Where can I find the actual price of high-sulfur Venezuelan crude?

  6. Pat Patterson says

    October 24, 2008 at 12:12 pm

    Where exactly was that quote from an OPRC spokesman sourced? I suspect that it is merely a lame attempt at humor.

  7. SFC B says

    October 24, 2008 at 12:36 pm

    Humor or a really bad translation.

  8. E.M.H. says

    October 24, 2008 at 3:00 pm

    Let it happen. Chavez’s economic structure is a shambles anyway, despite the record high oil prices. The loss of the crutch will show just how hollow his Bolivarian philosophy really is.

    As an aside: Note how selfish he is. Falling oil prices help the poor in oil importing nations. To heck with the US, what about his neighboring countries? What benefit accrues to them if oil remains at $80/bl?

  9. Pat Patterson says

    October 24, 2008 at 8:11 pm

    Jorg-Venezuela consistently only publishes prices for its light sweet crude, probably trying to mask how dependent they are on the heavy crude and its low price. The Energy Information Administration website lists prices for most countries oil per barrel but it should be noted that the prices bandied about on the news are an average of the 13 member OPEC nations and only based on light sweet crude. But scanning down the list we can use Canada’s prices for both types to get a truer picture of Venezuela’s heavy crude.

    http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm

    The lower the number the heavier the oil and Canada’s comparable grade of crude is consistently $12 to $14 per barrel compared to the higher numbered grades of oil. So with the oil basket closing at around $64 it is a safe assumption that the bulk of Venezuela’s oil exports are probably selling for $50 to $52 a barrel.

    The Venezuelans have released an 2009 budget that pegs revenues and spending at the benchmark of $60 but continued promises to increase the total amount spent of social programs, which means a large increase in the percentage spent, based on this new figure. Highly doubtful especially as Venezuela’s military shopping spree is now based on borrowings from the weapons source rather than paying out of their own budget.

  10. BryanS says

    October 24, 2008 at 11:06 pm

    Pat Patterson:

    Just did a google search on the security symbol from the posting by Gringo.

    Came up with this:
    http://www.bloomberg.com/apps/quote?ticker=CRVZVZBK%3AIND

    Looks to me that it’s typically 5-10% cheaper than the market average.

  11. Pat Patterson says

    October 24, 2008 at 11:39 pm

    BryanS-Thanks, that’s a little higher than I thought but still troublesome for Chavez. Plus I did some further checking and it seems that something like 75% of the heavy crude refined in the world, or rather the US, is done by the PDVSA spin-off, CitGo in the areas around Chicago and Cleveland/Cuyahoga County in Ohio. Since 2000 the Chinese have promised to build a heavy crude refinery but unlike building airports and railways they seem to always find a way to stall. One could almost think that they are just leading Chavez around by the nose?

  12. Pat Patterson says

    October 25, 2008 at 2:16 am

    BryanS-I finally got the link Gringo supplied to work and the price listed is the higher basket price(avg. sweet light crude). The much lower estimate via EIA refers to both light and heavy which, as I pointed out, shows heavy at the much lower price than 10%.

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