MARKET WATCH: OPEC cutting production to halt price decline

Crude prices closed lower Dec. 16, wiping out earlier gains in that session as the Federal Reserve chopped its key interest rate for overnight lending to banks to a range of zero to 0.25%.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 17 -- Crude prices closed lower Dec. 16, wiping out earlier gains in that session as the Federal Reserve chopped its key interest rate for overnight lending to banks to a range of zero to 0.25%.

That drastic reduction "sent the dollar index in a free fall," said Olivier Jakob at Petromatrix, Zug, Switzerland. "The [market volatility index] has come off slightly, but if it was to fall further, then we would expect the dollar index to face further pressure as it will lose the safe haven flows while providing no yield." The weaker dollar will force readjustments of retail prices "in non-dollar areas." Jakob said, "We need to keep in mind that a weak dollar has been instrumental in the sustained support to oil and commodities and a strong dollar instrumental to the fall of oil and commodities. Our dollar correlation models peg West Texas Intermediate at $80/bbl on the basis of the current dollar index, but more important than the outright number, we think that it is the divergence of trends that needs to be taken as a strong warning signs."

Analysts with Barclays Capital Resources in New York said, "US oil demand is at its weakest since 1983, but the Organization of Petroleum Exporting Countries is cutting output fast."

At a brief meeting Dec. 17 in Oran, Algeria, the 11 OPEC members currently subject to quotas agreed to cut production by 4.2 million b/d from their actual September output of 29.045 million b/d, effective Jan. 1.

At a meeting in September, those same OPEC members swore to "comply strictly" with the group's official production quota of 28.8 million b/d, set in 2007. Such compliance would have reduced actual production by 245,000 b/d. At a second meeting in October, OPEC members voted to cut production by 1.5 million b/d effective Nov. 1. That should have reduced the group's output to 27.3 million b/d. Subtracting those earlier promised reductions, OPEC actually is promising a third cut of 2.455 million b/d to reach its output target.

The additional cut surpassed general expectations of a 1-2 million b/d reduction. OPEC members said they are "firmly committed" to a total reduction of 4.2 million b/d to 24.8 million b/d. The group also renewed its call on non-OPEC producers "to cooperate" with OPEC's efforts to dry up the excess oil now flooding world markets. The group scheduled its next regular meeting Mar. 15 in Vienna.

In New Orleans, analysts at Pritchard Capital Partners LLC speculated that production cuts "would come mostly from the Saudis, UAE, and Kuwait." Prior to OPEC's announcement, they speculated that a lower-than-expected cut would likely push oil prices lower "while a cut over 2.5 million b/d would drive prices higher."

Pritchard Capital Partners said Saudi Arabia reduced its output by 1.2 million b/d to 8.5 million b/d from August to November. It said OPEC wants non-OPEC producers to shut in 600,000 b/d, including 300,000 b/d from Russia.

Analysts in the Houston office of Raymond James & Associates Inc. said, "While Russia has suggested that it could contribute to production curbs, its stance still remains ambiguous since no official commitment has been announced. On the other hand, Azerbaijan—one of the fastest-growing non-OPEC producers—has committed to a 300,000 b/d cut."

US Inventories
The Energy Information Administration reported Dec. 17 that US crude inventories increased 500,000 bbl to 321.3 million bbl in the week ended Dec. 12. The Wall Street consensus was for a 100,000 bbl gain. Gasoline stocks escalated by 1.3 million bbl to 204 million bbl, compared with a consensus of 1.1 million bbl build. Distillate fuel inventories increased by 2.9 million bbl to 133.5 million bbl in the same period, outstripping Wall Street expectations of a 900,000 bbl gain.

Imports of crude into the US dropped 286,000 b/d to 9.7 million b/d in that same week. The input of crude into US refineries fell 415,000 to 14.6 million b/d with units operating at 84.1% of capacity. Gasoline production rose to 9.2 million b/d while production of distillate fuel decreased to 4.6 million b/d.

Energy prices
The January contract for benchmark US light, sweet crudes traded as high as $46.53/bbl Dec. 16 before closing at $43.60/bbl, down 91¢ for the day, on the New York Mercantile Exchange. The February contract lost 77¢ to $46.70/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 91¢ to $43.60/bbl. Heating oil for January inched up 0.02¢, but its closing price was virtually unchanged at $1.46/gal on NYMEX. The January contract for reformulated blend stock for oxygenate blending (RBOB) rose 0.31¢, but again the closing price was virtually unchanged, at $1.04/gal.

Natural gas for the same month escalated by 10.6¢ to $5.75/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., declined 1.5¢ to $5.74/MMbtu.

In London, the January IPE contract for North Sea Brent crude lost 4¢ to $44.56/bbl. Gas oil for January dropped $16 to $468.50/tonne.

The average price for OPEC's basket of 13 reference crudes fell $1.79 to $40.74/bbl on Dec. 16.

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