OPEC regains market attention

Sam Fletcher
Senior Writer

Although the faltering economy has been driving down energy prices in recent months, the November US crude contract rebounded $2 to $71.85/bbl Oct. 17 on the New York Mercantile Exchange in anticipation that the Organization of Petroleum Exporting Countries would cut production at its Oct. 24 meeting in Vienna.

Thanks to some of the largest 1-day price losses in NYMEX's history, front-month US crudes have recently traded for less than half of the record $147/bbl that they commanded in July. Olivier Jakob at Petromatrix, Zug, Switzerland, noted US crude fell as low as $68.57/bbl in intraday trade Oct. 13-17, finishing down $5.85/bbl at the end of that business week. Heating oil lost $3.24/bbl in the same period, while the contract for reformulated blend stock for oxygenate blending (RBOB) was down $5.92/bbl. Jakob said, "On the other hand, natural gas gained 3.9%." North Sea Brent crude for December was down $6.22/bbl for the week.

The average price of OPEC's basket of 13 benchmark crudes gained 48¢ to $63.82/bbl Oct. 17 but was still down $8.85/bbl from the Oct. 10 closure. Thus far this year, the OPEC basket had averaged $106.13/bbl, up from $69.08/bbl for all of 2007. Days before the meeting, OPEC Pres. Chakib Khelil said a production cut was "very likely" since global supply exceeded demand by 2 million b/d. OPEC earlier lowered its outlook for world oil consumption by 450,000 b/d to 87 million b/d.

OPEC would not have moved its meeting from mid-November to Oct. 24 "if it had not already decided on a cut," Jakob said. "Everyone these days is getting a rescue plan and OPEC has decided it also wants one."

At Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., analysts were expecting a 1 million b/d reduction going into the meeting. "But we question whether weaker producers will be able to adhere to their quota during a downturn, particularly as additional cuts are likely to be required," they said. They estimated Saudi Arabia alone could reduce production by 1 million b/d "as long as the OPEC barrel fetched an average price of $60/bbl in 2009. By contrast, our estimates suggest Iran must earn $74/bbl in 2009 if exports fall even 100,000 b/d (to 2.4 million b/d)," they said.

Paul Horsnell, Barclays Capital Inc., London, said OPEC is likely to cut more than is necessary for the medium term, if prices are to be stabilized in the short run. "A cut of 1 million b/d with the potential for more cuts to come looks like a feasible starting point for discussions," he said.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "We believe OPEC production cuts are inevitable in this environment, but the experience of 1998 and 2001 suggests the cartel will struggle to cut production as fast as world growth is slowing." He added, "We now expect global gross domestic product growth to slow to 1.2% in 2009, and that this will translate into flat to declining oil demand. Energy and industrial metals commodities will be major casualties in this environment." As a result, he said, "We expect oil prices will average only $60/bbl and could bottom out at $50/bbl in 2009 or early 2010."

Industry reductions
Having already lowered its 2009 rig count forecast last month, Raymond James & Associates Inc. in Houston cut it again because "the economic situation has severely deteriorated," analysts said. "Additionally, reported US natural gas storage injections remain bearish despite more than 200 bcf of hurricane-related production shut-ins in the Gulf of Mexico." As a result, they said, "We now anticipate the US rig count will fall by more than 10% year-over-year in 2009 with a 40% peak-to-trough decline in the natural gas rig count. We expect the overall domestic rig count to fall 30% from its highs."

Raymond James expects US natural gas prices to remain depressed until late 2009 with the rig count hitting bottom in mid-2010 at an average 1,500, down 12.5% from 2009. "Between the reduced cash flows, the credit crunch, and the simple need to remove excess natural gas supply, we see no real way out of a severe slowdown in natural gas-directed activity in the US," they said.

FBR reduced its 2008 crude price forecasts to $105-110/bbl from an average $115/bbl previously. It lowered its 2009 outlook to $80-95/bbl, from an earlier pick of $110/bbl. Its 2010 projection is now for $70-$85/bbl, a "new downside" from the former estimate of simply $85/bbl. FBR's long-term estimate for 2011 and beyond is at $80-90/bbl.

(Online Oct. 20, 2008; author's e-mail: samf@ogjonline.com)

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