By Jason Simpkins
Oil prices slid below $75 a barrel yesterday (Wednesday) skidding to a new 12-month low and increasing the chances that the Organization of Petroleum Exporting Countries (OPEC) will cut production at its next meeting on Nov. 18.
Light, sweet crude for November delivery fell $4.47, or 5.68%, to settle at $74.16 a barrel on the New York Mercantile Exchange.
The price has now tumbled nearly 50% since peaking at a record-high of $147.27 on July 11. Gas prices have followed suit dropping 25% since breaching $4 a gallon in July. A gallon of regular gas fell by about 4 cents a gallon overnight to a new national average of $3.125, auto club AAA reported.
The credit crisis has emaciated countries around the world, sparking fears that a severe global recession is just beginning to set in. The outlook for energy has darkened substantially as a result.
The International Energy Agency (IEA) lowered its forecast for 2008 global demand growth by 250,000 barrels per day (bpd) to 440,000 on Oct. 10. The agency cut its 2009 growth forecast by 190,000 bpd to 690,000.
Yesterday, in its monthly report, OPEC reduced its forecast for 2009 demand by 190,000 barrels a day as well. It was the cartel's seventh consecutive forecast reduction. OPEC said that total oil consumption in developed countries fell by more than 1 million bpd in the year through September.
Developed nations in 2009 will need only 400,000 barrels a day more oil than this year, the cartel said, whereas demand from emerging markets will increase by an estimated 1.1 million barrels.
The forecast reduction comes approximately one month before OPEC members are scheduled to meet in Vienna, Austria to discuss current production volumes.
Last week OPEC President Chakib Khelil said it was "very likely" that the group would cut production at its Nov. 18 meeting. "The Organization is concerned about the deteriorating economic conditions with contagion risks," Khelil said.
That may change in November, as the economic outlook is considerably weaker.
"OPEC has to restore balance between supply and demand," Abdullah Al Attiyah, Qatar's oil minister told the London-based Arabic daily Al Hayat. "We will focus on the level of demand which will decline below supply contracts so we can avert a bigger problem in the future, which is a large increase in supply."
Attiyah did not elaborate on the size of the cut, but sources close to OPEC told the paper it could be around one million barrels per day.
Strangely enough, it's unlikely that the countries that have lobbied the most for a production cut in the past will actually be the producers to cut production. Iran, which is rapt with economic sanctions, and Venezuela, which relies heavily on energy exports to fund President Hugo Chavez's social agenda, desperately need the revenue.
That means Saudi Arabia, which controls a quarter of the world's oil and pumps over 10% of the global crude supplies, will bear the greatest responsibility in cutting production.
"I think the cut will not be very big considering the fact that Saudi Arabia believes a price of $85 is suitable and not worrying for its economy as the Kingdom and other Gulf oil producers have based their budgets on an oil price of $45-50 a barrel," Mohammed Al Ramadi, an economics professor at King Fahd Petroleum University told Emirates Business 24/7. "This means the situation is still not worrying."
News and Related Story Links:
- Money Morning:
Saudi Arabia Hesitant to Join OPEC in Production Cut
- Emirates Business 24/7:
Opec likely to agree on small output cut