OPEC ministers met November 29 and most agreed that members need to cut production at its next OPEC meeting on December 17. With demand steeply lower and global inventories higher, the $64,000 question is just how much should they cut?
According to Philip Verleger, it's got to be a big cut.
In his widely-read weekly analysis, "Notes at the Margin," energy economist Verleger suggests that OPEC should execute an "astounding 7.7 million barrels per day" just to restore market balance today.
Here's why, according to Verleger:
-Global demand is down in December year-over-year by 5.2 million b/d to 81.6 million b/d, from 86.8 million b/d.
-Non-OPEC production is projected at 49.4 million b/d, with OPEC NGLs at 5.2 million b/d, and processing gain at 2.3 million b/d.
Verleger says that after adding those numbers, the call on OPEC is at 23.7 million b/d. By contrast, Platts' estimate of OPEC production in October was 32.26 million b/d, before its recent cut of 1.5 million b/d reached at a meeting in November. A call of 23.7 million b/d would stand in stark contrast to the IEA's estimate of a fourth quarter call of 31.1 million b/d and a full 2009 average of 30.4 million b/d.
"The implication, then is that OPEC countries need to reduce quotas not by one million or two million barrels per day, but rather by six or seven million barrels," Verleger says in his report. "Since cuts of such magnitude are out of the question, one should expect prices to come under further downward pressure."
Downward pressure is already evident; WTI crude oil prices have since fallen roughly $20/b since OPEC announced a production cut of 1.5 million b/d at its October 24 meeting.
While demand is at low levels, the current contango in crude prices is causing a rapid stock build. The contango in the front of the NYMEX crude futures curve is rapidly approaching levels last seen in April 2007, when a backlog of barrels in the Midwest due to a fire at Valero's 170,000 b/d McKee, Texas refinery sent US stocks soaring. The then active front-spread in NYMEX crude settled at minus $2.83/barrel on April 11, 2007, while the January/February calendar spread settled at minus $2.65/b Monday after settling last week at minus $2.12/b.
In an interview, Saudi Oil minister Ali Naimi said that global inventories were "a little too high at 55 days of forward demand cover rather than the apparent target of 52 days." But Verleger says in his report that while OPEC officials think global stocks cover 55 days, the correct number is probably between 61 and 62 days, far more than the International Energy Agency has estimated. Infact, the cover may still increase by the next meeting.
"By OPEC's next meeting, global stocks may cover 65 days of forward consumption," Verleger said. "This, I believe, would be a record."
Does it mean that the world is not just in recession but deflation and can get into Depression much greater than 1930? Does it also mean that it has been uncontrolled speculation which had taken crude to dizzying heights? Who were the ultimate beneficiary of the rise & fall of Crude Price? Can they be called financial terrorist who has terrorised the industrial world as well as financial world.?
It's a stain on Platt's to uncritically report Verleger's whacked out math. Especially when considering Verleger's woefully inaccurate record and his strong preference for hyperbole over facts. He's just grabbing headlines and you are playing along.
Not impressed.
Altough right now deflation seems to the way to go, but, with Fed & other central banks increasing the money supply exponentially across the globe - time would come when banks would start doing what they know best - LENDING MONEY. When that amount starts flooding the streets, we are going to have HYPER-INFLATIONARY MONSTER RUNNING AMOK.
Gregor, your point is valid. But let me add that Platts' reporters are seeing massive builds in inventories in all their markets. Nobody knows exactly what constitutes full tanks, but clearly, we're getting close. So Phil Verleger's projections that we might be at 60+ days of cover does not seem at odds with what we're seeing in the physical markets. Even as the contango was widening, there was some feeling that traders would not be able to take advantage of the curve because of a credit squeeze. But that does not seem to be happening across-the-board. Certainly there are going to be some players who can't get the credit to buy now and store, but there are enough that are able to do so that clearly, tanks are being filled.