This week’s price drop sets the stage for what may be the most pivotal OPEC meeting in years. If oil prices stay in the vicinity of Wednesday’s close, then OPEC will only be receiving on the order of $55 a barrel for its oil, below or close to the price the nearly all the members need to keep their spending at current levels. A production cut is obviously in order and, as usual, the question remains of how much, how it will be allocated, and will the more desperate members adhere to their quota.
Pre-meeting statements by various oil ministers mention a cut of anywhere from one to three million b/d. OPEC has already asked major non-member exporters such as Russia, Norway, and Mexico to join them in cutting production, but so far all have refused.
Many analysts are skeptical that a multi-million b/d reduction can actually be accomplished as OPEC members have a long history of ignoring quotas and pumping as much as they can sell. Although conventional wisdom says that demand for oil is falling rapidly, that may not necessarily be the case. Prices are back to last year’s levels, the drop in US consumption seems to be slowing, and China’s consumption is still increasing. Too much of a production cut could easily drive prices back to levels seen earlier this year, and exacerbate the world’s economic situation.
Several OPEC ministers have now mentioned a price of $70-90 a barrel as the proper level for stabilizing the market. Whether OPEC has the power to fine tune such a price level in the face of the most turbulent markets ever is yet to be seen. Many analysts expect that we will see a price jump next Monday after the OPEC decision but that oil prices will soon fall back to moving with the equity markets, the dollar, and the prospects for the economy.