NEW YORK (Dow Jones Newswires), October 17, 2008
Thirty-five years ago, against the backdrop of the Yom Kippur War, OPEC's Gulf members announced a unilateral jump in crude oil prices to $5.12 a barrel, shattering traditional relationships with multi-national oil companies.
Price Now 20% Below Year Ago
Crude oil futures in the U.S. slid by nearly the value of OPEC's inflated prices back in 1973. November delivery Nymex crude lost $4.69 a barrel, or 6.3%, to $69.85 a barrel, the lowest price since Aug. 23, 2007. Prices lag the year-ago level by nearly $18 a barrel, or more than 20%, the biggest percentage gap since late June 2007.
The wheels have come off the gravy train for OPEC as prolonged high prices have slashed global oil demand. And the slide has been greased by the credit crunch tsunami that started in the U.S. housing market and has now sent tremors through the global banking and finance sector.
Global oil demand in 2009 is expected to inch higher amid recession fears and sluggish economic growth. It's not farfetched to consider global demand could decline for the first time on an annual basis since 1983.
Instead of talking of boosting oil prices, which could compound problems and cause further shrinkage in demand, OPEC officials speak of the need to balance the market. OPEC knows that fast-building inventories in consumer countries, teamed with slower growth, is a sure-fire recipe for sustained price weakness.
But the code words belie the fact that many in OPEC are desperate for oil revenue. Iran and Venezuela need prices closing in on $100 for their budgets, while the Saudis can get by on half that level.
In the U.S., the world's largest oil consumer, oil demand in the latest four weeks is down 8.9%, or 1.82 million barrels a day, to 18.6 million barrels a day, the lowest level since June 4, 1999, according to the Energy Information Administration. Through Oct. 10, demand this year is off 5%, or 1.1 million barrels a day. On an annual basis, that would be the biggest drop since 1981.
1 Mln B/D Minimum Cut
Despite continued recovery of Gulf Coast refineries from hurricanes Gustav and Ike, U.S. crude stocks rose 5.6 million barrels in the latest week and are near year-ago levels. Measured against refinery demand, stocks are up slightly against the five-year average.
EIA's report of the sizable stock build deepened the sell-off. The value of all that oil in tank, marked-to-market at last Friday's prices, was just under $24 billion. At Thursday's settlement, the value of the stockpile was about $21.5 billion - a loss of 10%, caused mostly by simple knowledge of its existence.
Analysts are ratcheting up estimates of how big an ax OPEC will have swing next Friday at its Vienna talks. The 1 million barrel-a-day level from current output floated in recent weeks is now thought of as a minimum level.
Still, the question of who in the group actually will cut output comes to the fore.
After OPEC's talks just five weeks ago, the Saudis made it clear they didn't intend to cut output as implied by the OPEC pledge to stick to production quotas, seized upon by price hawks as an effective cut of half a million barrels a day.
The Saudis made clear they would continue to meet customer demand, the term used to justify a rise to a 25-year high of near 9.7 million barrels a day this summer, on direct order of King Abdullah. But customer demand surely has fallen since September, allowing the Saudis the fig leaf to trim supplies somewhat and come to the table next week as a good OPEC citizen.
Still, if actions don't take, and prices fall to $60 a barrel, the level where companies start rethinking projects, OPEC could still find itself at a November meeting to take another crack at the market emergency ahead of scheduled December talks.
Copyright (c) 2008 Dow Jones & Company, Inc.
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