As Oil Use, Price Slide, OPEC's Hawks Fret

NEW YORK (Dow Jones Newswires), October 9, 2008

Right on cue, OPEC's price hawks are calling for an emergency meeting as the price of the group's reference basket of crudes hits $80 a barrel for the first time in a year.

The clamoring from Libya, Venezuela and others comes amid indications that even already deeply reduced expectations for global oil demand next year still may be too high, given the widening financial crisis.

Officially, the Organization of Petroleum Exporting Countries hasn't scheduled talks before the Dec. 17 session in Algeria, but talk was swirling Wednesday of a possible meeting Nov. 18 meeting.

An early OPEC session, coming after the U.S. Nov. 4 presidential election, would focus on the divisive issue within the group over what oil price level to defend by cutting oil output.

OPEC's price hawks would try to bring pressure to bear on Saudi Arabia, the world's biggest oil exporter, to lead an output cut and, effectively, a bailout of producers seeing prices slide from record highs.

The Saudis, the de facto OPEC leader, wouldn't welcome the spotlight. Prior to OPEC's September meeting, Saudi watchers said the kingdom favored letting prices drop from record highs near $150 a barrel to as low as $80 to give the global economy a boost.

As the price of global benchmark North Sea Brent crude fell below $100 early last month, OPEC pledged to adhere to previous output restraints. The move implied a steep Saudi cut from a unilateral increase in the summer directly ordered by the Saudi king, to curb soaring prices.

But the Saudis made it plain before leaving last month's OPEC talks they had no intention of aggressively cutting output and would continue the policy of meeting customer demand.

Deepening Crisis May Steel Saudis  

In the weeks following OPEC's talks, the U.S. banking crisis deepened and morphed into a worldwide crisis that stirred major central banks to take the extraordinary step of coordinating a cut in their target interest rates in an attempt to ease strains on the global financial system.

Given the crushing weight of the crisis on global economies, the Saudis may be even less likely now to want to prop up oil prices.

Analysts said OPEC price hawks such as Venezuela and Iran start to have budget difficulties with oil prices below $90 a barrel.

Renewed pressure on oil prices, from a global credit crunch, comes as demand is falling sharply, but may still be overestimated.

Oil demand in the U.S., the world's largest oil consumer, fell 124,000 barrels a day to 18.341 million barrels a day in the week ended Oct. 3, according to data released Wednesday by the Energy Information Administration. That's the lowest demand level since Sept. 21, 2001, in the wake of the 9/11 attacks on the U.S. The demand drop was a massive 11.8%, or 2.45 million barrels a day, from a year earlier.

In the last four weeks, a period covering two major hurricanes that hit the Gulf Coast region, demand was 18.66 million barrels a day, the lowest for any four weeks since June 4, 1999, and a fall of nearly 1.8 million barrels a day, or 8.6% from a year ago.

Year-to-date U.S. oil demand is down 4.9%, or more than 1 million barrels a day below a year ago, at 19.69 million barrels a day.

EIA on Tuesday tripled the size of the projected drop-off in U.S. oil demand for the current quarter, and said it expects a full-year 2008 decline of 830,000 barrels a day, the biggest fall since 1981.

Following 2008 oil demand of 19.85 million barrels a day, the lowest since 2002, the U.S. appetite for oil is expected to dip further in 2009, to the weakest rate since 1991.    

Revisions Need Further Revisions  

The global picture is just as gloomy. EIA revised worldwide oil demand in the current quarter down to growth of just 0.85%, from an expected rise a month ago of 1.3%. The rate of demand growth for all of 2008 was cut in half, to just 0.4%, while the 2009 forecast was slashed to 0.5% growth from 1.1% growth expected a month ago.

But no sooner had the impact of the deep cuts rippled through the market, then EIA said at a Washington, D.C., press conference that its downbeat forecast may still be too optimistic because assumptions about core economic indicators are outdated, given the escalation of the financial crisis.

EIA's Tuesday forecast was based on U.S. economic growth of 0.8% in 2009, a revision from 1.2% growth in its month-earlier projection.

But the International Monetary Fund said on Wednesday it slashed its own 2009 forecast for U.S. economic growth to just 0.1% from an earlier 0.8% projection in July.

If U.S. economic growth increases by just 0.1% in 2009, as the IMF projects, this would be the weakest full-year economic performance since 1991, when the U.S. showed negative growth of 0.2%.

IMF also cut its global economic growth outlook to 3% for 2009, from 3.9% earlier.

But some analysts believe that figure still is too high.

Adam Sieminski, chief energy economist at Deutsche Bank Global Markets in Washington, said his bank's projection calls for global economic growth of just 2.3% in 2009, saying even the lower number from the IMF "may be overly optimistic."

Deutsche Bank's projection of $85 U.S. crude oil for fourth quarter 2008 and first quarter 2009 holds up unless global economic growth deteriorates further, he said.

Nymex November-delivery crude oil futures traded to an intraday low of $86.05 a barrel Wednesday, the weakest since level since Dec. 6, 2007, before settling down $1.11 at $88.95 a barrel. The intraday low marks a 42% drop from the intraday record high of $147.27 a barrel hit four months ago on July 11.
Oil, Money Taps Open  
Sieminski said that the Saudis, by keeping output high, are acting as oil's central bankers, while the Federal Reserve, the European Central Bank and others are keeping the money flow taps open as well.

"The Saudis are likely explaining to the oil price hawks that OPEC must help stem the economic crisis in order to keep oil demand from falling away rapidly as it did in the early 1980s," he said.

At $85, most oil exporters are balancing their budgets, Sieminski said, "but the difference between $105 and $85 on an annual basis is the equivalent of a $635 billion injection to oil consumers globally," based on demand of 87 million barrels a day.

That, he noted, is close to the value of $700 billion U.S. rescue package.

"In our view, the Saudis want to see financial markets stabilizing before they talk about stabilizing oil prices," he said.

Copyright (c) 2008 Dow Jones & Company, Inc.


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