Wednesday, 10 September 2008

OPEC and Oil..

The OPEC meeting in Vienna has seen a couple of surprising developments and clear evidence that this once all-powerful organisation is in danger of losing control to the global markets along with most Governments.

First, Indonesia has left the organisation - less of a surprise since this large nation has now become a net importer of oil emphasising the growth in Asian demand. Second - OPEC has agreed to cut oil production by 520,000 barrels a day from the Autumn. This had the effect of arresting the freefall in prices which had seen crude slip below $100 a barrel in New York trading. The price rallied back to $104 but the price remains volatile.

OPEC has been slow to recognise the speed and depth of the global downturn and the consequent effect on demand and its revenues. As economies have slowed and demand has fallen, so global speculation has forced the price back down from its July peak of $147 (even though the price fall hasn't yet materialised at the pumps).

The problem of course for western (and Asian economies) is that recovery will lead to increased demand for oil which in turn risks another price spike such as we saw last summer. In addition, a cold northern hemisphere winter and geopolitical tensions could also lead the oil price back upward. It will be a difficult game for OPEC to play and it's clear that further supply cutbacks are a possibility before the end of the year. This could be beneficial in underpinning the oil price at a sustainable and stable level within which economies can begin to recover though in the medium to long term the supply/demand balance remains precarious.

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