Crude prices started the week with the January contract touching $49 on Monday on prospects for an OPEC production cut and closed out the week trading as low as $32 a barrel due to a shortage of storage space for the expiring contracts. Oil prices were rather confused last week as the futures market is in “contango” with later months trading for higher and higher prices. Oil for delivery 5 years from now and beyond, for example, is trading up in the $70 range.

For days prior to OPEC’s meeting in Oran on Wednesday, numerous spokesmen emphasized that a “surprisingly sizeable” cut would be made. Moscow even chimed in by talking about a production cut of up to 300,000 b/d. When the actual OPEC cut of 2.2 million b/d was announced and with no new cuts from Russia for now, the oil markets were underwhelmed.  Oil prices fell for three days, finally stabilizing on Friday after the January contract expired.

OPEC is now aiming to cut production by 4.2 million b/d from September’s production total of 29.0 million b/d. Only 900,000 b/d of this cut is scheduled to come from Venezuela and Iran, the two countries in the most desperate economic straits and the most likely to evade their quotas. This is still a sizeable cut even if only the Gulf Arab states adhere strictly to their targets. Venezuela, however, has already announced a production cut of 189,000 b/d. This is a good start on its cut-quota of 350,000 b/d and an indication that more of a cut may actually be made this time.

The oil markets still appear seized with the idea that the worldwide demand for oil continues to drop rapidly. Traders cite the buildup in US and OECD crude inventories and note that the major oil companies are planning to store 50 million barrels onboard supertankers due to excess production and the lack of conventional storage space.

While US consumption is down by about a million b/d and demand in China and Japan is down too, there are signs that the decline could be stabilizing due to the relatively low product prices. China has just made cuts of 14 and 18 percent in the price of gasoline and diesel fuel respectively, which will stimulate demand. The hundreds of poorer countries and small islands that were in desperate situations last summer with oil at $140 a barrel should now be able to afford oil again.

The latest official production estimates and forecasts from the IEA say that worldwide demand for oil in 2008 will shrink, but only by 200,000 b/d.  The Agency now projects that the “call on OPEC” for 2009 will only be about 800,000 b/d below 2008. There are obviously major discrepancies among the market pricing of oil, the 4 million b/d production cuts planned by OPEC, and IEA forecasts for demand next year.