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All Talk, No Action

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As expected OPEC members met in Cairo and failed to cut production despite weeks of discussing it in the news.

OPEC members want to see strict compliance with the November 1st cut before taking any further action. They said they expect to see updated production reports before the Dec-17th meeting and they will act on those reports only if everyone is in compliance. Back in October OPEC said they were cutting production by 1.5 mbpd but the levels they announced were actually 1.88 mbpd below their October production. Some countries, especially Saudi Arabia had been producing well over quota. In order to return to compliance they had to cut more than the announced quantity. Several nations have complied strictly with the new quota but several others are lagging behind.

Delegates discussed production cuts at the weekend meeting and agreed that it would probably take another 1.0 to 1.5 mbpd cut to balance production with prices at the Dec-17th meeting. When asked if there would be a production cut at the December meeting, OPEC secretary General al-Badri told reporters, "There will be action there - It will be a good amount, a good quantity" but he failed to name a specific number.

Crude prices fell -1.25 to $53.15 when they reopened for trading Sunday night. OPEC pointed to the 10% surge in U.S. imports last week as evidence there is too much oil in the market. "The higher stocks rise, the longer it will take to rebalance once OPEC cuts begin to take affect."

About the only thing OPEC delegates agreed on was where the price should be. $75 has continually been quoted as a fair price for oil but that number will still not be high enough to cover bloated budgets for several OPEC countries. Saudi took the unusual step of targeting $75 as a fair price. As the largest producer in the world and with the greatest chance of actually controlling prices Saudi is always seen as the unofficial spokesman for OPEC direction. Without Saudi agreement and cooperation on any production move that move is doomed to fail. Today Saudi has stated excess production capability of 2 mbpd over what they are pumping. They can flood the market if they want to lower prices or withhold production to push prices higher. No other single OPEC nation can move prices without help from its neighbors. Saudi Oil Minister Ali al-Naimi said "there is good logic for $75 oil. You want to know why? Because I believe $75 is the cost for the marginal producer. If the world needs supply from all sources we need to protect the price for them. I think $75 is a fair price."

OPEC watches an inventory number called "days to cover" when planning production changes. OPEC President Chakib Khelil said on Saturday the commercial oil inventories held among industrialized nations of the OECD could hit 59 days by the end of 2009 if OPEC does not take further action on supply. The latest estimates are that stocks are at 55-56 days of cover and OPEC likes to target 52 days to cover. At 86 mbpd that equates to 4.47 billion barrels in inventory.

Jim Brown

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