OPEC slashes production 1.5mb/day, but will it stop oil’s skid?

WRITTEN THIS MORNING (OCT 24, 7AM)

This morning OPEC convened and arrived at a decision to cut 1.5 million barrels of oil per day. Many of you are likely asking what we can now expect and what will happen. Let me try to shed some light for you.

It will be an interesting day on the market, that is for sure. Traders will have to fight it out- some traders will likely view this as a sign that OPEC is deeply worried about a world recession and that cutting production is an “endorsement” by OPEC that demand has fallen significantly, along with many countries only major source of cash… oil. Unexpectedly, Venezuela was NOT the OPEC member seeking the biggest cut in production, as I would have expected with their attitude towards the U.S.

The cut is one of the largest cuts I’ve seen from OPEC who usually cuts under 1 million barrels/day. You can see the worry that these countries have as some simply can’t operate now with “normal” oil prices. I’m hoping the Saudi’s will not follow their quota and keep pumping oil. World inventories are ALREADY too low in my opinion, and this cut worries me enormously. Whenever the world decides to come out of recession, this cut COULD likely mean RECORD oil prices- but that will definitely depend on how long we have this economic slowdown.

Today, we have 311,380 million barrels of oil (excluding the SPR) in U.S. inventories. That compares with an all-time high of 391,907 million barrels on July 27, 1990, and a low of 263,666 million barrels on January 23, 2004. We’re still trying to recover from that low. Just this past January (2008), we had 282,841 million barrels in storage. We really need to have inventories at 350,000 million barrels but OPEC doesn’t want to keep pumping.

Demand of gasoline has fallen and stayed under 9.0mb/day, and I expect that EVEN WITH this announcement, it will take some time for oil to reverse its course.

NOTE: Wholesale prices today in GR are $2.46. We have a ways to drop yet.

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