Low Oil Price, High Stocks Equals Bad Days for OPEC

NEW YORK (Dow Jones Newswires), December 4, 2008

There's no question these are strange days for the oil market. The steady climb from below $44 a barrel to the July record intra-day high above $147 took nearly 900 trading days from early 2005.

The breath-taking reversal was nine times faster.

Crude-oil futures took the express elevator down Thursday to a low of $43.51 a barrel, and likely still haven't hit the basement yet.

Light, sweet crude for January delivery settled down $3.12 a barrel, or 6.67%, at $43.67 a barrel on Thursday on the New York Mercantile Exchange, the lowest level since Jan. 5, 2005. Prices have dropped 20% in the past four days on doubts over OPEC's ability to rescue prices amid slumping demand.

Just days before the official start of winter in the Northern Hemisphere, Ministers of the Organization of Petroleum Exporting Countries will meet Dec. 17 in Algeria to try again to halt the precipitous slide in prices.

Winter brings shorter days with fewer hours of sunshine, and typically strong oil demand. But in the topsy-turvy market churned by the global economic crisis that many believe rivals the Great Depression, even winter demand growth isn't certain this year, and that means more pressure on OPEC to slash output.

Unless OPEC gets a handle on reducing bloated global oil inventories, the days of lower prices are far from over.

"They need to come up with a credible way to show they're taking another 2 million to 3 million barrels a day out of the market" in the first and second quarters of 2009, said Jan Stuart, economist at UBS Investment Research in New York.

So far, OPEC is off to a slow start in trimming output, despite forecasts that global demand will show its first full-year decline since 1983.

A Dow Jones Newswires survey found that total OPEC output fell by 815,000 barrels a day in November from October. The 11 OPEC members who agreed to cut output by 1.5 million barrels a day from Nov. 1 only cut by less than 60%, and pumped 619,00 barrels a day above their target.

Stock Levels Don't Measure Up

That slow start and the continued weakness in price and demand leaves OPEC with a monumental task in shoring up the market.

At talks in Cairo last weekend, Ali Naimi, oil minister of Saudi Arabia, called $75 a barrel a fair price for oil, but some traders believe $35 is more likely in the near term. Naimi's target refers to the cost of marginal production of future supplies and serves as a warning that necessary long-term investments would be at risk if prices stay low.

Near term, though, Naimi said OPEC wants to tighten inventories to levels that appear nearly as far-fetched as a quick return to $75 a barrel would be.

"Winter is coming and hopefully inventories will fall to 52 to 53 days" of forward demand cover in the major industrialized nations, such as the U.S., that comprise the Organization for Economic Cooperation and Development, he said.

But in these days of falling oil consumption, holding 52 days of demand cover in inventories means far less oil than it used to. And that means bigger problems for OPEC.

At the end of October, OECD stock stood at 56 days of cover, with inventories at 2.7 billion barrels, according to estimates from the International Energy Agency, the OECD's oil-policy watchdog. That's based on OECD oil demand of around 48.2 million barrels a day in the current quarter.

But IEA sees demand from the industrialized nations dropping to 47.9 million barrels a day in the first quarter of 2009, a fall of 900,000 barrels a day, or 1.8% from a year earlier.

For stocks to hit Naimi's target of 52 to 53 days cover, they would need to shed 200 million barrels by the end of the first quarter from the end-October stocks level, to near 2.5 billion barrels. By comparison, first-quarter 2006 OECD stocks of 2.59 billion barrels amounted to 53 days of demand cover.

U.S. Inventories Rise In November

OPEC's November output cut would reduce stocks by only around 25 million barrels. Meantime, early U.S data show that inventories grew by more than 13 million barrels in the month, blunting the impact of the OPEC cut.

The rise in U.S. November stocks, at a rate of 440,000 barrels a day, was the biggest for the month since 2004 and followed a stock drawdown of 645,000 barrels a day in November 2007, data from the Energy Information Administration show.

Assessing demand levels is a meld of art and science and data are constantly revised. Stock levels for the OECD nations are the most transparent, but data from elsewhere is less reliable. OPEC's own projections of demand from the major industrialized countries through the first half of 2009 exceed IEA estimates by 200,000 to 820,000 barrels a day.

What's more, OECD countries are expected to make up only 55% of global oil demand in the first quarter of 2009, down from 56% a year ago, as emerging nations, such as China, play a greater role in the market.

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