Monday, December 01, 2008

OPEC Postpones Further Cuts Until Next Meeting

Sources: OPEC Paves Way for Production Cut This Month, Financial Times; OPEC to Hold Yet Another Meeting—In Cairo, BusinessWeek; OPEC Confirms Consultative Ministerial Meeting in Cairo November 29, Tehran Times

OPEC, the supplier of forty percent of the world’s oil, held a meeting on November 29th in Cairo, coinciding with a gathering of Arab oil ministers already scheduled for that day. Although oil prices continue to plummet, OPEC agreed to defer further output reductions until its members comply more fully with cuts agreed on over the past three months.

The members that have failed to fully comply are nations that need higher oil prices to balance their economies, such as Venezuela, Iran, and Nigeria. Other OPEC members, such as Saudi Arabia and the Gulf states are better-able to handle lower prices, although Saudi Arabia has indicated that it would like to see prices rise back to $75 a barrel.

Though further cuts were avoided this time, there was a general consensus for action at OPEC’s next meeting on December 17th in Algeria. Some analysts have indicated that the decision to postpone another production cut until December will result in a significant fall in prices in the upcoming days.

However, although prices have continued to fall, markets don’t seem to believe that the low prices are here to stay. The forward price for oil five years out remains in the $80 a barrel range. But until then, OPEC will likely hold a plethora of meetings and make additional production cuts in an attempt to keep prices from heading into the dreaded $30-$40 a barrel range.

Discussion: Is it fair for OPEC to require less wealthy members, such as Nigeria and Venezuela, to comply with cuts before it will make further output reductions? Will the current global credit crisis put a strain on the organization? Was the seemingly pointless meeting in Cairo primarily an attempt to promote and showcase the organization’s continued cohesion?

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