OPEC Production Cut?

Oil Falls, When Will We Hear From OPEC?
April 1st, 2008
By John Troland, Tom Waterman

Houston, TX - May Nymex prices have fallen this morning, continuing the long liquidation that began Friday.

The Iraqi hype ended on Monday when Iran told Shiite antagonists to cool it, as a spread of that violence would certainly have brought the U.S. into a more involved role.

On April Fools Day, it's ironic that the great lie of the past two years, that oil is worth $100 and more, may finally be giving way. But the day is young and we can't help but wonder which OPEC country will step up and announce that the cartel needs to reduce production in the second quarter, just one day into that quarter.

Crude oil has been at glut levels for more than two months and if prices tumble to the mid-$90s, there will be an immediate reaction from the hawks within OPEC. The early money favorite is Hugo Chavez, with Iran running a close second. We need to include Algeria in this equation, despite the fact that it really doesn't want to cut a single barrel of production. Then again, neither do Iran or Venezuela. No, all OPEC countries will look to Saudi Arabia to provide the necessary restraint.

It's hard to calculate just how much production needs to be scaled back. We had once predicted that OPEC would announce a 500,000 bpd cut for the second quarter, but based on current demand trends in the U.S., Europe, and yes Asia, plus some additional non-OPEC supply in the near term horizon, the cut to refuel this market might need to be 750,000 to 1 million bpd. Anything short of that level probably won't avert what seems destined to be a steady decline in oil prices.

So where did the speculators go? Apparently, with the announcement by the Fed that more oversight in all financial markets, including commodities, is needed helped induce long liquidation in virtually all commodities on Monday, although natural gas was a notable exception. Today natural gas joins the liquidation party.

Or, the U.S. dollar improved, probably on the government's announcement Monday, which hastened an exit from long positions. In either case, if speculators are moving away from commodities, fearing that the government may be catching on to the scam they have engineered over the past two years, there is a chance that the fundamentals of supply and demand might have to be considered once again, after a long period of total disregard.