OPEC Sets $100 Floor for Oil

The surprising announcement of a 520,000 barrels per day (bpd) production cut for 40 days by OPEC embers led to a sharp reversal in crude oil prices which had dropped to a 10-month low of $98.89 overnight and traded above $103 again.

The cut brings production back in line with a 28.8 million bpd limit oil exporters had set a year earlier. OPEC ministers said the cut was aimed to reduce a current oversupply.

It certainly was a strong sign that crude producers want to keep prices in the three-digit area.

At $100 oil, OPEC countries rake in $86.4 billion in monthly oil revenues.

From Bloomberg:

Crude oil jumped in New York as OPEC President Chakib Khelil called on members to stop producing more than the group's set quota after prices fell to almost $100 a barrel.

The Organization of Petroleum Exporting Countries is pumping about 520,000 barrels a day more than their 28.8 million-barrel limit, Khelil said. The group kept its output quota unchanged after adjusting for the departure of Indonesia and including new members Angola and Ecuador, according to Bloomberg data.

"It's definitely a defensive measure to keep prices above $100,'' said Jonathan Kornafel, a director for Asia at Hudson Capital Energy. "They don't want to see us go back to $140 or $150 but they want us over $100. It's a bit of a shock to the market and that's why we're up.''

Bloomberg also cites a study that says speculators sold $39 billion in oil futures between the July peak at $147 and September 2. Limits on traders would cut oil to $65/$70, it is believed.

Commodity index investors, blamed for record oil prices, sold $39 billion worth of oil futures between their July record and Sept. 2, causing crude to plunge, according to a report to be released today.

The work by Michael Masters, president of the Masters Capital Management hedge fund, blames investors who buy and hold an index of commodities for driving prices to records, and for their subsequent drop. It comes a day before the U.S. Commodity Futures Trading Commission is set to discuss its own study of energy trading with a congressional committee.

Masters testified three times before Congress this year, arguing that limits on traders would cut oil prices to $65 to $70 a barrel. He has been cited by lawmakers who introduced at least 20 measures to curb speculation. Congressional pressure on the CFTC to step up enforcement and restrict anonymous trades has pushed index traders out of their positions, Masters said.

New upward pressure may come from hurricane Ike which is expected to make landfall in Texas.

Hurricane Ike started to strengthen as it entered the Gulf of Mexico and headed in the direction of Texas, after leaving more than 170 people dead when it lashed Cuba and Haiti.

Ike's eye was 100 miles (165 kilometers) north-northeast of the western tip of Cuba and moving west-northwest at 7 miles per hour at 2 a.m. Miami time yesterday, according to the U.S. National Hurricane Center. Ike's winds strengthened to 80 miles per hour from 75 mph earlier.

The storm is forecast to make landfall between Corpus Christi, Texas, and Houston, according to a chart from the Hurricane Center.

Find the US short term oil outlook from the Energy Information Administration here.

Gold followed oil to a new 2008 low around $763.

Comments

[Jason Rines...:]

This should be reassuring to alternative energy investors.

2008 Sep 10 03:30 PM

[G. L. Turner:]

The Saudi Oil Minister, in a separte comment, said that they would "keep all customers well supllied, quota or no quota"....that comment was not publicized along with the main statement...Hmmm...

2008 Sep 10 10:31 PM

[NOWHEREMAN:]

They do not have that capability. WTI is not their only export. They export the other grades of which there is over supply. Might as well leave it in the ground.

2008 Sep 11 03:23 PM

[Urbane Gori...:]

"That is what we have in the McCain/Palin Ticket. No nonsense".... Please... We're talking about politicians... Clearly you haven't been around very long and apparently, you're willing to spout off without even researching what you're talking about... Just Google either party and 'pork', 'illegal', 'earmark' .... etc...

jegan

2008 Sep 11 03:35 PM

[kebu77:]

YogiG: "The Saudi Oil Minister, in a separte comment, said that they would 'keep all customers well supllied, quota or no quota'... that comment was not publicized along with the main statement... Hmmm..."

Deja Vu all over again: Are the Saudis re-doing 2004? OPEC may 'set' a $100 floor, but it is up to KSA to comply. My guess is they won't because their shot-term political interest is in keeping the party in power. KSA sees the US as a check on a growing Iranian threat. McCain may not intend to stay in Iraq for 100 years, but clearly intends to stay longer than Obama. KSA opposed the US invasion, but once in, they wanted Bush to stay in office in 2004.

So, in spite of OPECs announced intent to reduce production, look for the Saudis to continue its high level of production thru the Nov. election, in its second attempt to decide a US presidential election. (The case can be made that KSA succeeded in 2004 when it produced way over quota beginning several months before the election and Bush won by a hair - - compare KSA actual production to quota, April-Oct 2004.) This time, they will fail due to the political fundementals (Google: lichtman + 13 keys). Even so, if I was Obama, I'd be pissed for the next 4 to 8 years.

So Kerr, Rubin and other (temporary) bears may find, when the dust settles that the avg. oil price in '08 is closer to $100 than $115. Then, in 2009, geology oil fundementals replace the geopolitical issues and oil starts its march to the Maxwell-Pickens-Simmon... $200 level. Things happen, like KSA lets its wells rest, Iraq fails to settle down, the North Sea and Mexico continue their precipitous declines, the engineers running China continue their massive capital expansion, and 2009 marks the fourth straight year of declining oil exports (Google: "Jeffrey Brown" + "Export Land Model").

More bullish views will return as it, again, separates itself from the herd. "Just my opinion, I could be wrong," but for starters watch the next eight weeks.

2008 Sep 12 02:55 PM