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El-Badri Says OPEC Is Cutting `Huge Oversupply'.
Sept. 10 (Bloomberg) -- OPEC Secretary-General Abdalla El- Badri said the group's decision to adhere to production quotas means it is cutting output by about 500,000 barrels a day.
OPEC members are reducing a ``huge oversupply'' of oil on the market, El-Badri said today during a press briefing at OPEC headquarters in Vienna. Before the cut, the group was producing 900,000 barrels a day above its quota, he said.
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READING THE TEA LEAVES
"The market is going back to its fundamentals." -- OPEC Secretary-General Abdalla El- Badri, September 2008
What are the fundamentals?
The fundamentals, in this writer's opinion, means that "Peak" oil speculation has been "squeezed" out of the market because now, obviously, OPEC is not at peak capacity, but significantly below peak capacity.
Leading OPEC member states like Saudi Abrabia, the leading OPEC producer, have said many times during the run up in price that fundamentals were in balance (supply and demand) and that prices of $80 a barrel were in line with those fundamentals.
Saudi Oil Minister Ali Naimi has talked about maintaining a floor of $80 a barrel, nearly 25% lower than current levels.
Expect oil prices to continue going down to the $80 a barrel.
(While oil prices jumped on the immediate news that OPEC agreed to a cut in production, today, the price of oil dropped.)
Per Bloomberg, September 10, 2008:
PETROLEUM ($/bbl)
PRICE* CHANGE % CHANGE TIME
Nymex Crude Future 103.02 -.24 -.23 16:21
Dated Brent Spot 97.63 -.90 -.91 15:28
WTI Cushing Spot 102.58 -.68 -.66 15:37
Back to "fundamentals."
Good news for the World Economy.
"HUGE OVERSUPPLY"
When the head of OPEC states there is "huge oversupply" and OPEC decides to cut production, what is the purpose?
Answer: Preventing a crash in oil prices.
And as much as this writer supports lower oil prices -- a crash -- would not be conducive to orderly development to oil & gas supplies.
Exploration & production of oil & gas are capital intensive, with huge outlays of capital before even a single drop of oil flows.
Volatility in oil prices is bad, both for consumers and producers.
A steady price signal is crucial for informed business & investment decisions.
A price crash would send the wrong signal to the the established oil industry and discourage, if not outright prevent new players from getting into the business of exploring for and producing oil & gas.
This writer has consistently written of the need for new players in the exploration & production of oil & gas to spur competition and diverisfy supply.
OPEC's decision to cut production was not about driving prices upward, on the contrary, it was to facilitate an orderly reduction of price -- to the $80 a barrel level.
Then to reassess the world economic picture.
OPEC being a responsible "player" in the world economy?
It looks like that from here.
Imagine that!
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