OPEC announced after the meeting ended on Tuesday that they were going to cut production by 520,000 bpd to 28.8 mbpd. OPEC had been widely expected to announce no cut but then quietly drop "over quota" production back to zero. That 28.8 mbpd number is confusing to almost everyone who really watches the monthly production figures.
OPEC pumped an average of 32.575 million barrels per day in August according to a survey of oil companies, producers and analysts. Those 12 members with existing quotas produced an average of 30.265 mbpd. However the OPEC statement says they will cut production by 520,000 bpd to 28.8 mbpd. I am not a math wiz but you can easily see that those numbers do not match. To drop back to 28.8 mbpd from the August levels would be a cut of 1.465 million barrels per day. That is a far cry from the announced cut.
So now OPEC watchers are left with the question of who is lying to whom? Since OPEC does not trust it's own members and has to rely on outside tanker trackers to determine how much each country produces surely they know the August levels were much higher. The data is easily available on the Internet. Another possibility may be OPEC lying to the world. Since 99.9999999% of the world's population has no clue how much oil is produced or by whom they will hear a nicely sanitized announcement of a minor 520,000 cut back to OPEC's quota level. No big deal, OPEC is taking out the oversupply, etc.
Saudi Arabia is currently overproducing by more than the announced cut all by itself. Recent rumors claim the 700,000 bpd that most thought they were over quota could actually be over a million barrels instead. For Saudi that suggests getting back into quota alignment would cost them $105 million in revenue per day to appease OPEC officials. That is a pretty big hit to the treasury but Saudi can afford it.
There is also the possibility that OPEC is lying to everyone and they are not really going to slow production materially. With oil trading under $102 on Tuesday it may have been just an attempt to prop up prices. Oil shot up to $104.60 on the news so the ploy worked in the short run.
We will not really know for about three months and that is another fallacy of the plan. OPEC's cutback is effective immediately but they allowed a 40-day window for implementation. 40 days would be around October 20th and mid month. That means we really won't get a clean post cutback production number until mid December when the tanker trackers report the November numbers. Mid December just happens to be the same week as the next production meeting on Dec-17th. That is clever how they scheduled that. Nobody will know if OPEC is really producing at the new quota of 28.8 mbpd until Dec 10th and they meet again on the 17th.
For whatever reason they decided to announce the change and regardless of how much production is actually cut the first salvo in the price protection war has been fired. By announcing the cut even after saying as late as 6:PM ET that no change was coming they have suddenly decided to support prices at $100. That is also a level that most analysts thought was strong support. The battle line has been drawn and it remains to be seen if traders are going to step over it, or actually under it in this case.
Hurricane Ike appears to be changing direction again and the storm track is moving ever so slowly eastward towards Houston. With three more days before landfall anything is possible to none of the oil patch is truly safe tonight. By 6:PM on Wednesday we should have a more accurate track now that it has moved into the gulf and away from land.