Cheap oil
When the Organization of Petroleum Exporting Countries meets at its Vienna headquarters on Friday it will be reminded of just how slippery the price of oil can be, and how little control the cartel has over its price.
Faced with a the possibility of a global recession and a sharp decline in energy demand, OPEC will discuss slashing oil production in an emergency meeting.
OPEC president Chakib Khelil, Algeria’s oil minister, said there could be a “significant” reduction in the organization’s daily output of 29 million barrels.
The organization considers the market to be oversupplied by two million barrels a day, but it has yet to agree on the size of the cut. This lack of agreement could hinder its efforts to control prices.
“Two million barrels a day is a very big number and it’s not that easy to do,” said Joseph Stanislaw, an energy expert and independent senior advisor at the consultancy Deloitte & Touche. “It’s possible. It’s doable. But the question is how long it takes them to agree.”
Stanislaw said it’s impossible to predict whether a production cut would actually stop the price plunge, given the severity of the economic crisis and the volatility in international markets.
“OPEC’s challenge is the challenge that the entire world is facing: all previous rationales of what makes prices go up or down are all up for grabs,” said Stanislaw. “No one knows how to establish a value anymore.”
Khelil told Dow Jones reporters on Wednesday that non-OPEC members would go along with the cut.
A recent statement from Deputy Prime Minister Igor Sechin of Russia – a non-OPEC nation vying for the top-producer title from Saudi Arabia – said on Wednesday that his country would set aside oil reserves in an attempt to control prices. But he said it would not cut production.
Manouchehr Takin, an analyst at the Center for Global Energy Studies, said a production cut probably would drive down prices, at least in the short term. But Takin added that oil prices are difficult to project because they are influenced by fluctuations in the international markets. But for the near future, he expects demand to continue to weaken.
“There will be even less demand in the coming months because the weakening in the global economy will continue,” said Takin.
Prices jumped by $2.80 to $74.25 a barrel on Monday, as investors first weighed a potential supply cut from OPEC. But these gains soon disappeared as investors bet that OPEC wouldn’t be able to control prices through cuts.
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