OPEC's Power to Influence Oil Price Slips Away

By Louis Basenese

Oil prices have dropped, after OPEC announced that it would cut productions by 2.2 million barrels a day – it steepest cut ever.

But in response, Wall Street has done little more than yawn. In fact, prices actually went down. The price of oil per barrel dropped again Thursday morning to $39.90, under its 4-year low. Merrill Lynch’s oil guru, Francisco Blanch, thinks oil could reach $25, while we suggested $20 just last week.

No one seems to know or have any control over where oil is going, least of all OPEC. It couldn’t stop oil from going to $147; perhaps its influence on the price of oil is lost. Has it underestimated the amount of demand destruction occurring in the market as well?

OPEC represents only 40% of the world’s oil producing nations, and their proposed cuts are guidelines – not regulations. The simple fact is that they cannot stop nations like Iran and Argentina from pumping as much oil as they want.

And combined with a drop in demand, our oil supplies have flourished. The EIA reported crude supplies rose by half a million barrels last week, with gasoline and distillates rising by three to five times as much.

And while Thursday morning’s market conditions are weighing on producers, cheap gas doesn’t seem to have affected them. Exxon Mobil (XOM) is actually up almost 9% over the past 30 days alone, while Chevron (CVX) and BP are both up over 7%. The oil & gas sector is up over 12% since November 18th.

Comments

[Steven Hansen:]

so many times in the past we have had obituaries of opec. this is not a tight knit cartel but a loose one in a traders style. if a tightly controlled cartel called the fed cannot control the dollar, opec stands no chance against the economic free fall. don't write them off - give them some time to get the prices up.

2008 Dec 19 03:51 AM

[john s. gordon:]

current oil price dropoff continues, fueled by speculators/hedge funds dumping their overleveraged positions.
> jack

2008 Dec 19 08:55 AM

[Ferdinand E...:]

OPEC cannot stop Iran and Argentina from pumping more oil, says the author. No, I don't guess that they can, except that Argentina is probably one of the smallest oil producers in the world, and Iran probably has no excess capacity - and in addition it was their idea to cut production. Something I've noticed is that nobody of any importance has suggested that an oil price decline will be permanent. The hand is correct: sooner of later the oil price will be climbing again.

2008 Dec 19 10:24 AM

[Steven Ward:]

It takes OPEC 18 to 24 months to get the price off a floor. That's been the history. They can't keep the price high but they can drag it off the floor. give it two years.

Venezuela and Iran will cheat like crazy until the saudis put it to them.

2008 Dec 19 11:54 PM

[Michael Fit...:]

The important point isn't the control OPEC has on prices in an economic downturn when demand falls off a cliff (i.e. now). The point is that OPEC has us by the shorthairs when demand rises, and therefore oil prices rise, and therefore OPEC gets enriched while the US digs deeper into bankruptcies. Articles like Arthur Laugher's (pun intended, it's actually Laffer), a supposed "economist", that suggests Obama is wrong-headed in his desire for energy independence, apparently simply don't "get it" that OPEC (and russia) will have the ability to checkmate our economy at any point in the future that they wish. it is unpatriotic and unsustainable for the US to remain dependent on 65% imported oil (used to be 70% prior to the downturn).

2008 Dec 20 11:15 AM