MARKET WATCH: Crude prices fall despite cut in OPEC output

Oil futures prices fell more than 7% in early trading Oct. 24 to the lowest level in 17 months after OPEC decided in a brief meeting to cut production by 1.5 million b/d effective Nov. 1.

Oct 24th, 2008

Sam Fletcher
Senior Writer

HOUSTON, Oct. 24 -- Crude futures prices fell more than 7% in early trading Oct. 24 to the lowest level in 17 months after the Organization of Petroleum Exporting Countries decided in a brief meeting to cut production by 1.5 million b/d effective Nov. 1, from the current official level of 28.8 million b/d.

Industry analysts generally expected a reduction of 1-1.5 million b/d, although some said it could be as large as 2 million b/d. In its latest monthly report, OPEC said its member countries produced 32 million b/d in September. In Washington, DC, White House officials expressed disappointment over OPEC's "antimarket" decision rather than rely on the fundamentals of open, competitive markets. OPEC indicated it will consider another production reduction at its December meeting, depending on market conditions.

Other commodities and stock markets experienced broad declines in early trading Oct. 24, with the Dow Jones Industrial Average down more than 300 points and gold futures apparently headed for that market's worse week in 28 years. "Sellers are out in force today, as all three broader equity futures contracts are down the maximum amount allowed premarket," said analysts in the Houston office of Raymond James & Associates Inc. "Energy stocks face a double hurricane today—more commodity price weakness amid a broader market sell-off."

In the Oct. 23 session, natural gas prices dropped to a 13-month low after the Energy Information Administration reported the injection of 70 bcf of natural gas into US underground storage in the week ended Oct. 17, up from an average injection of 62 bcf for that time of year. That brought the amount of working gas in storage to 3.3 tcf, down 77 bcf from the year-ago level but 93 bcf above the 5-year average.

OPEC outlook
"OPEC Pres. Chakib Khelil stated the cartel wants to stabilize prices between $70-90/bbl, but it remains an open question whether this cut will be sufficient to offset demand weakness and, secondly, what the degree of enforcement will be," said Raymond James analysts. "Skepticism remains about OPEC's ability to offset deteriorating demand with oil trading down over $4.50/bbl despite the announcement."

Saudi Arabia will bear the brunt of the production cuts, chopping 466,000 b/d. Other reductions include Iran, 199,000 b/d; UAE, 134,000 b/d; Kuwait, 132,000 b/d, and Venezuela, 129,000 b/d. Other members are expected to cut less than 100,000 b/d. The new quota exempts Iraq, which is still not back to prewar production levels, and Indonesia, which will suspend its OPEC membership at the end of the year.

Analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., said, "While it is possible that Saudi Arabia and the other producers can meet this target, we would expect some of the cartel members to defect and exceed prescribed volumes if prices continue their slide, particularly given the size of quota cuts borne by Venezuela and Iran."

Despite the proposed cutback, FBR analysts said, "Saudi Aramco will proceed with plans for 100,000 b/d of new production from Dammam field, under the eastern Saudi city of Dhahran, in 2012." They said, "OPEC production cuts (and subsequent discipline in holding to quotas) are unlikely to halt Saudi Arabia's expansion projects already under way, including the 1.2 million b/d al-Khoreis project, as state-owned and private producers are likely to need revenue in the coming years, but delays are certainly likely."

Meanwhile, Olivier Jakob at Petromatrix, Zug, Switzerland, said, "There is a more silent wave of production reduction, which is in the starting blocks of non-OPEC countries. On Wednesday it was Petrobras announcing it was delaying the release of its 2009-13 plan and could delay development of the subsalt deposits; yesterday it was Suncor (Canada oil sands) announcing it was delaying its expansion plans…. Medium to small size E&P companies have started to be hurt by the credit crunch and are now starting to be hurt by limited cash flows linked to the lower oil prices."

Jakob said, "The silent reality is that below $60/bbl there will be a flattening of the non-OPEC production curve but that will be seen through the course of 2009 rather than in the remainder of 2008."

Energy prices
The December contract for benchmark US light, sweet crudes dropped $1.09 to $67.84/bbl Oct. 23 on the New York Mercantile Exchange. The January contract lost $1.08 to $68.24/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 78¢ to $66.74/bbl. Heating oil for November delivery declined 0.68¢ to $2.03/gal on NYMEX. However, the November contract for reformulated blend stock for oxygenate blending (RBOB) gained 0.69¢ to $1.58/gal.

Natural gas for the same month fell 35.8¢ to $6.42/MMbtu on NYMEX, the lowest closing for a front-month gas contract since Sept. 25, 2007. On the US spot market, gas at Henry Hub, La., dropped 36¢ to $6.60/MMbtu.

In London, the December IPE contract for North Sea Brent crude gained $1.40 to $65.92/bbl. Gas oil for November was up $4.25 to $667.25/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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