As OPEC Sets Crisis Talks, Market Mulls $30 Oil

NEW YORK (Dow Jones Newswires), November 17, 2008

It seems the only people using more oil these days are OPEC ministers jetting off to crisis talks about tumbling global oil demand and collapsing prices.

OPEC ministers will hold emergency talks in Cairo on Nov. 29. Confirmation of the rumored talks came Friday as OPEC also said the price of its reference basket of crudes fell to $47.73 a barrel, the lowest since May 2005.

It's unclear whether OPEC will weigh further cuts in Cairo or simply assess the impact of output cuts agreed in last month's crisis talks ahead of still further talks scheduled for Dec. 17 in Algeria.

Alarm bells are ringing for OPEC because extra oil sloshing around in the market not only drags down prices now, but adds to bloated inventories and threatens to keep values depressed for months to come.

U.S. crude oil futures dipped to near $55 a barrels early Monday and some analysts warn that the bottom may be as low $30 to $35 a barrel. Inventories in consumer countries could climb to their highest level since 1998 as global oil demand posts the first year-to-year drop since 1983, they warn.

Amid the global economic meltdown, OPEC's reference price for crude has fallen by about 17% since it met on Oct. 24 to announce a Nov. 1 cut in output of 1.5 million barrels a day. In a budget-bruising drop, prices are down a whopping 66%, or $93 a barrel, from the highest price for OPEC oil, of $140.73 a barrel set in July.

Analysts had expected OPEC to agree a further cut of 1 million barrels a day in its output ceiling at a Dec. 17 meeting in Algeria. Now they are reworking the numbers to see whether that cut would be enough to mop up extra supply and if the earlier meeting date would make a difference in stabilizing the market.

Ministers from the Organization of Petroleum Exporting Countries are still set to meet in December, their fourth consecutive monthly gathering and the sixth conference this year, not including a hastily arranged meeting with producer countries in Saudi Arabia this summer, called to address record-high oil prices.

First Demand Drop Since 1983

Deutsche Bank said Friday that crude oil prices could fall to as low as $30-$35 a barrel, levels last seen in late 2003 and early 2004.

But while Adam Sieminski, the bank's chief energy economist, is holding to a $60 forecast for U.S. benchmark crude oil in 2009, he warns that world oil demand next year will fall for the first time since 1983 due to the global economic turmoil.

Sieminski forecasts a 500,000 barrels a day drop in global oil demand in 2009, adding that even with huge revisions, latest forecasts from public sector oil agencies are still too optimistic. The U.S. Energy Information Administration expects global oil demand to be virtually unchanged in 2009 from 2008, while the Paris-based International Energy sees growth of 350,000 barrels a day in 2009.

OPEC's expert staff said in a report Monday that "closer monitoring and more frequent intervention" in the oil market are required amid the current turbulence. OPEC cut its estimate for global oil demand growth in 2009 by 270,000 barrels a day, but still expects an increase of 490,000 barrels a day.

A slight silver lining for OPEC in the dark clouds over the oil market is that credit problems are keeping oil companies from building inventories as high as they might otherwise.

In the U.S., the world's largest oil consumer, crude oil stocks as of Nov. 7 are up 2% on a year ago at around 312 million barrels, but are some 12% below the recent high hit in June 2007. Measured against refiner demand (which is expected to hit a 12-year low for November), stocks cover 21.6 days of need, above the five-year average of 20.8 days.

U.S. crude oil and petroleum products inventories cover 52.6 days worth of stunted demand, compared with the five-year average of 48.8 days and the most in November since 2001.

Call For Non-OPEC Cuts

The IEA said commercial inventories held by the major industrialized nations in the Organization for Economic Cooperation and Development covered 56 days of demand in October.

OPEC, in early September, said it considered prevailing OECD stock cover of 53.4 days "comfortable."

But Sieminski sees stock-cover in the major industrialized countries rising to 57 days by the third quarter 2009. EIA said stock cover hasn't reached or exceeded that level since the third quarter of 1998, when prices were 30% below a year earlier.

In times of weak oil demand growth, as in 1998 and 2001, Sieminski said, OPEC output cuts provide little early support for prices. Market rallies lagged by three to six months from the last cut in OPEC output during those years.

"Since we expect the current quota reduction cycle to persist until the fourth quarter of 2009, it implies any sustained rally in crude oil will have to wait until sometime in 2010," he said in a report. In 2010, prices will average $57.50 a barrel, a $2.50 dip from the projected 2009 level, but will climb to an $80 a barrel average in 2011, he said.

With prices continuing weak, keeping OPEC harmony and achieving real output cuts will become increasingly difficult.

Although non-OPEC producers like Norway and Mexico are experiencing steep output declines and would ignore such pleas, OPEC is likely to urge producers outside the group to limit supplies to help rebalance the market. The Cairo meeting, which has been added to an already scheduled meeting of Arab oil exporters, is a likely venue to press the case.

It was in Cairo in December 2001 that OPEC took a ground-breaking step in this direction, under Algerian Oil Minister Chakib Khelil, who then, as now, serves as the group's president.

Back then, OPEC had earlier said it would cut output by 1.5 million barrels a day, but would do so only if non-OPEC producers made collective cuts of 500,000 barrels a day.

Russia, which recently has made strong overtures of increased cooperation with OPEC and said it wants to have more influence over oil prices, already has committed to attend the group's December meeting in Algeria as an observer.

Back in 2001, Russia, after earlier snubs, contributed 150,000 barrels a day of the non-OPEC cuts sought by OPEC. Still, some said the Russians simply were making virtue of necessity, as output already was expected to drop in the Siberian winter. Now, IEA projects Russian output of 10 million barrels a day in 2008 will drop to 9.85 million barrels a day next year.  

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