OPEC spoils the party

Just as oil finally drops below $100/ barrel, those party-poopers at OPEC go and cut production levels again...

Last Updated: 31 Aug 2010

Hours after the oil price dipped below the symbolic $100/ barrel mark for the first time in months, oil production cartel OPEC said that it would reduce production to late 2007 levels. Traders had been expecting the cartel to reduce production slowly, if at all, so the unexpected drop in supply sent the price straight back up to $104 again. With the days of $147/ barrel oil still fresh in the memory, couldn’t they at least have let us enjoy it for a day or two first?

At a meeting in Vienna, the members of OPEC – who between them account for about 40% of the world’s oil production – decided to stick to the limits imposed in September 2007. This will reduce its output by 520,000 barrels a day, to about 28.8m barrels. The cartel said that the global economic slowdown was driving down demand, while the strength of the US dollar, easing geopolitical tensions and increased supply were all pushing down prices. ‘All the foregoing indicates a shift in market sentiment causing downside risks to the global oil market outlook,’ OPEC said today.

In some ways this development is predictable. Some of the oil-producing countries – notably Saudi Arabia – have boosted production in recent months under pressure from their Western allies, to drive down the sky-high prices. So now things seem to be under control again (Brent crude dropped below $100/ barrel yesterday, while crude prices are also heading that way), you can’t blame OPEC for reducing supply to normal levels.

Nonetheless the move seems to have come as a bit of a surprise, not least because the Saudis – who’ll be responsible for most of the reduction – said this week that they thought the current levels were about right. And more importantly, there’s also a chance that cutting supply (and thus driving up prices) will if anything reduce demand even further – and if you can rely on one thing from OPEC, it’s naked self-interest...

So it looks like we’ll have to wait a while longer for $100/ barrel crude. Then again, it could be worse on the energy front: at least CERN’s new particle accelerator, which conducted its first experiment this morning, didn’t create a black hole that destroyed the entire universe. So look on the bright side.

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