THE WALL STREET JOURNAL
DECEMBER 15, 2008
By NEIL KING JR. and SPENCER SWARTZ
ORAN, Algeria — The world’s big crude-oil exporters are caught in a downward race against falling demand as they scramble to keep prices from slipping still lower in the face of a weakening world economy.
At a pivotal summit in Algeria this week, ministers from the Organization of Petroleum Exporting Countries could move to cut as much as two million barrels a day from production, having already agreed to slice a similar amount since prices began to drop in late July. OPEC furnishes about 40% of the world’s daily consumption of about 86 million barrels.
OPEC’s moves to rein in production have been drowned out by a cascade of gloomy economic data from around the world. Oil stockpiles are building rapidly from China to the U.S. Gulf Coast as the global economic slowdown continues to eat away at demand, which just months ago still looked to be increasing at an unstoppable rate. The challenge now facing OPEC is whether the cartel — after weeks of muddled messages — can send a strong and credible-enough signal to arrest the steep drop in crude-oil prices, which have tumbled 68% since the record high in July.
In November, OPEC members shaved their output by about 825,000 barrels a day, according to the International Energy Agency. Some analysts say members have cut much more since August.
The price of U.S. benchmark crude, which closed at $46.28 a barrel Friday on the New York Mercantile Exchange, has dropped by nearly a quarter since OPEC met last month in Cairo to debate its next steps.
The most ominous news for OPEC is China’s sudden slowdown, which was raised vividly last week with reports that China’s exports fell in November for the first time in seven years.
The world’s second-biggest oil consumer after the U.S., China is facing its slowest economic growth rate in almost 20 years as financial problems in the U.S. and elsewhere diminish demand for Chinese exports and force manufacturers there to ax capacity and energy use.
A lingering question is whether any non-OPEC nations such as Norway and Russia will help OPEC and cut their own output.
Russian President Dmitry Medvedev said Thursday that his country, the world’s biggest oil producer outside OPEC, was considering whether to lower its oil output to support crude prices and to seek OPEC membership. Russian Deputy Prime Minister Igor Sechin and Energy Minister Sergey Shmatko are scheduled to attend the OPEC meeting.
But how meaningful any announced cut by Russia would be is a question mark. Because its oil output is falling naturally because of underinvestment, Russia already is, in effect, helping OPEC without actually turning off any taps. Any reduction from Russia, depending on the size, could simply be repackaging naturally declining output as a “cut.”
Some economists now compare OPEC’s plight to that of the early 1980s, when soaring crude prices helped spur a recession in the U.S. and Europe. Oil demand fell sharply, as did oil prices. It took nearly 15 years for U.S. consumption to return to 1980 levels.
Many forecasters now predict that global oil demand next year will be the weakest in more than two decades, another sharp turnaround from expectations earlier in the year. In January, the U.S. Energy Department’s forecasting arm put global oil demand next year at just over 89 million barrels a day. It now estimates that demand in 2009 will be 3.7 million barrels a day less than that.
Energy economist Philip Verleger has a much darker view, arguing in a recent report that oil demand next year could prove so weak that OPEC in the next year will need to trim at least five million barrels a day from production to avoid oversupply.
The cartel has hinted it would announce substantial cuts this week, but ministers have offered few specifics. In Cairo last month, Saudi oil minister Ali Naimi said the “fair price” of oil should be around $75 a barrel — a target many analysts contend may be out of reach next year unless the economy turns around markedly.
“We’re looking for OPEC to cut by at least another one million barrels a day early next year in order to have an impact on prices,” said Michael Wittner, senior oil analyst at Société Générale in London. “And they could have to do more depending on what demand does.”
Saudi Arabia, accounting for more than one-third of OPEC’s total production, will be forced to shoulder most of the cutting burden, as has usually been the case, Mr. Wittner said.
But getting the cuts just right to account for falling demand will be tricky. The economic downturn is hurting capital expenditure and forcing the shelving of a slew of drilling operations, not just in the U.S. but also in some OPEC countries.
Oppenheimer & Co. senior oil analyst Fadel Gheit estimates world oil supply is likely to drop by three million to five million barrels a day in 2009, due to OPEC cuts and smaller companies slashing production, compared with a decline of just one million to two million barrels a day in global oil demand.
This scenario of overtightening supply relative to demand would reduce global oil inventories a record 10% to 30%, pushing crude prices significantly higher later in 2009, Mr. Gheit said.
While many analysts contend oil prices will remain low next year, and possibly through 2010, the market continues to anticipate higher prices, with contracts for oil to be delivered several years in the future selling for significantly higher prices than oil for delivery early next year.