If OPEC cuts production...

Here we go again...

At OPEC's next meeting on December 17th in Oran, it is widely expected that the oil group will institute one of the biggest production cuts that it has ever implemented. Not to be out-done, the group is also asking the wild card in the market, Russia, to meet an "obligation" to help the group put the brakes on the slide in oil prices.

While a distinct possibility that OPEC will bring in a major cut amounting to close to an expected 2 million barrels, I don't expect the Russians to follow suit with OPEC. Russia wants more customers for it's oil and, weaning their way out of any possible OPEC influence just might be the way for the Russians to gain some further world economic influence. Don't expect the Russians to follow suit even though they're just as badly in need of US currency as anyone else. There is a vested interest for the Russians not to follow OPEC's lead as there is to follow the price-fixing cartel.

So, what would the effect be on pricing if OPEC did close the door on some production?

To OPEC, there is no sense in allowing further export of a product that, right now, is in low demand. The danger to OPEC here is that oil will rise again and bring a renewed interest in oil fields that have a higher initial capital cost to them. In other words, keeping the price low would effectively keep other oil fields from being developed. If I were an OPEC member, there can be no doubt that I would attempt to sway fellow members into letting oil freely flow, at least at present levels, and help keep the price of oil low for the sake of keeping other projects off the radar.

Witness Alberta...

With major projects in the oil sands being shelved and workers heading back to their home provinces and countries, it would be a little inopportune for OPEC to help support the price and help keep the projects going. OPEC needs to get these workers out of Alberta and help keep Alberta from being a major supplier to Uncle Sam. It would be a very long re-start before any other fields open in the tar sands if OPEC simply waits the ebb-tide out. That's why it's not likely that Russia won't follow the OPEC lead; there's a chance for the country to gain more influence on oil sales to the US.

December 17th, we'll find out if OPEC will really pull the trigger...

But, if they do cut in the face of the most recent economic news, the markets simply haven't paid OPEC too much attention in the face of a prospect of a two million barrel per day cut. While oil has increased in value by about five bucks since last Thursday's price change, it has since fallen back by another three to sit at $44 bucks US. In other words, while we might see a slight hiccup in prices, it's not likely that OPEC is going to impact price until Russia joins in the fray and then, they both might have more to lose. There's a prediction out there from the International Energy Agency that says consumption of oil will be 500,000 barrels per day less as a result of the downturn in the world economy and they don't have the full scope of the economic damage yet. After all, after losing $103 US a barrel since the first week of July, does anyone?

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Six days out of seven show little change in heating/stove oils, just a bare cent down on diesel and a rough 2.9 up on gasoline. I'll have more concrete numbers later tonight so, look out for the press release then!

Regards,

George