Behind the Numbers: Problems Loom for OPEC 13 comments
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So far OPEC has been relatively successful at cutting oil production and keeping oil prices propped up. Saudi Arabia is leading the charge saying, more or less, it’s going to do what needs to be done.
They have been able to stick together, but how long can it really last?
It’s been somewhat of a surprise to see most of the OPEC members “stick to the plan” so far. Back in A Slippery Slope Ahead for Oil Prices, we looked at:
Falling oil prices puts these countries into a bind…
…a lot of countries will be facing big problems if oil falls further or if they cut production enough to keep oil prices propped up. When hard times hit, OPEC members look at what’s best for themselves instead of the group.
Since then oil prices have fallen off quite a bit and have reached what appears to be a bottom – at least a temporary one. And anytime oil prices to start to move up, there’s always some government economic data or Nouriel Roubini to knock oil prices right back down. You’ve got to remember, it’s only been six months since oil was over $140 a barrel. Oil producing countries made it through the first part of the downswing, but some big budget shortfalls are coming.
A recent IMF study shows a lot of countries are truly “addicted to oil.” In fact, most of the leading oil producing countries, OPEC and non-OPEC, won’t even be able to pay the bills in 2009 without oil prices rebounding - quickly.
Source: International Monetary Fund and CNBC
There’s plenty more that lived high on the hog while oil prices were high. Venezuela needs $95 oil just to fund all its social programs and break-even in 2009. Russia will be running a deficit too if oil doesn’t average $70 a barrel next year.
They’ve all got to do something. They can borrow at extremely high rates of interest, if any lenders are even available. They could cut spending; raise taxes, or some combination thereof. None of which is likely going to go over too well with the citizens. Or they can just print money. Regrettably, the easiest option is probably the worst.
Disclosure: I have no positions in any of the stocks mentioned.
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This article has 13 comments:
Next time you write something perhaps ask yourself the following before you submit it to SA:
1. Does the piece tell us something that we don't already know and have not known for months
2. Will the information or insigths contained in the piece allow us to make money in some way.
I submit that had you asked those questions of the above piece, the answers would be no, and no.
On Jan 25 03:00 PM NutritionFacts wrote:
> What a useless addition to SA this is.
> Next time you write something perhaps ask yourself the following
> before you submit it to SA:
>
> 1. Does the piece tell us something that we don't already know and
> have not known for months
> 2. Will the information or insigths contained in the piece allow
> us to make money in some way.
>
> I submit that had you asked those questions of the above piece, the
> answers would be no, and no.
>
>
You forgot another option. They can sell assets, such as European and US stocks and bonds, which drives asset prices down. Even if they don't sell, the fact that they are not buying is problematic, as the financial markets were using them as a guaranteed source of "dumb money", to "rescue" Citi, Barclays, UBS, etc.
The recent Kuwaiti backout of the deal they had with Dow Chemical is probably (a) the result of the decline in oil price, and (b) is shaping up as a disaster for Dow Chemical, given their imprudent purchase of Rohm & Haas at an absurdly inflated price, and in cash, not in stock.
Thus, while lower oil prices are a blessing for consumers, the laws of unintended consequences raise their ugly head.
If OPEC cut just another 5% of there output or about 1.5 mil/day the market will burn through the so called pail of oil in no time ( 1 - 2 months ) , and then the price will rise to 70-75 / barrel or for 5% cut they WILL achieve 50% rise in there revenue.
I am really amused how ignorant people in America are. Do you think that OPEC HAVE to keep pumping OIL like NO TOMORROW just to make Americans HAPPY with the low price ?
Mark my words mister Andrew Mickey, OPEC WILL CUT production again in MARCH and the price will rice to where THEY WANT to be. The game for America is OVER dear ! NO FREE LUNCH !!!! ... muaaaaahaaaaaaaaa........
OPEC pumps about 40 percent of the world’s oil and agreed last month to cut output by 9 percent starting Jan. 1 to prevent a glut and stem falling prices.
The 11 member-states covered by the agreement will reduce January output by about 5 percent, consultant PetroLogistics Ltd. said Jan. 23 based on tanker movements.
www.bloomberg.com/apps...
"Meanwhile, U.S. domestic oil production is increasing rapidly. In fact, domestic oil production will probably increase in 2009 for the first time since 1991. "
I called him out on it on the last one he wrote about oil, in this article he is basically trying to say the OPEC members will cheat. He's wrong on that too. Numbers are coming in and OPEC is doing very well on compliance. One more month and they should have it down to 24.125 mmbpd. His premise is that the need to pump more oil to make up for a budget shortfall. He doesn't say it outright, but the implication is clear with his statement of
"They have been able to stick together, but how long can it really last?"
I have heard this before and OPEC does cheat. But really since 1999 they have done well when they cut. Their compliance runs into trouble when prices are rising, as members try to cash in. Most oil bears leave this fact out. What I am hearing from OPEC is that some contries want to take control of the foriegn owned field and shut them in or curtail them back. This way they can cut more supply but in effect it increasing the net production as in some OPEC countries the government only gets 20-30% royalty from the IOC (internation oil companies). So by taking 100% of the oil they increase production net to them by 70%. They can cut back but still increase net. That is another option for OPEC, further resource nationalism.
My issue with the author is that I dont really think he is that smart. I am finding factual errors everytime he writes an article and he leaves important data out. Sad to think he is giving advice about money.
Just my opinion.
BTW Mr Perry, those 15 tankers Iran has full of oil, if they wanted to sell it, someone would by it. They are playing the contango.
PooBah
If you are making 2 MMBPD and the OPEC quota you are assigned is lowered from 2.0 MMBPD to 1.5 MMBPD you have to store 500,000 bo per day until one can lower produciton rates at the source. Once rates are lowered to 1.25 at the source you can start to add 25000 bo per day from your storage. DO you see the issue? If you have 15 tankers full of oil you have 30 MMBO if they are VLCC tankers. At a throughput of 25 MBO per day it would take a while to unload those tankers. My point is that is more of a logistics and infrastructure issue than a lack of buyers. Maybe...
Just my opinion though.
PooBah
Thanks, now let's see, what is the bottom line here? Well, OPEC is doing fine. Things were just lovely for them when the oil price was racing up, but that isn't going to happen again for a while, and they will just have to learn to live with that situation.
And they are going to learn! When Chinese and Indian demand pick up again it will move the OPEC countries into the winners circle - assuming that this is where they want to be - and they know it. I know that there are many people in this old world of ours who study the oil market even more religiously than my good self, and I am ALWAYS willing to hear what those folks say, but when somebody intimates - as Mr Mickey apparently did - that the future oil production in the US is something to feel confident about, then it's time to tune out.
The point Mr Mickey is that US output is on the downward slope of its frequency curve regardless of occasional upward lurches, and as several persons in this forum have made clear, optimism is counterproductive. The next time you have lunch with the new president tell him to get a comprehensive energy program together, and to do so as soon as possible.