Economy falling faster than OPEC production

OPEC took the middle road, cutting their oil production a hefty 1.5 million barrels per day (almost 5%). The cut was enough to have an impact in slowing oil’s price decline, but not so much it would considerably damage already flailing economies worldwide. In the short-term, their production cut was drowned by a dramatic fall in global stocks that has sent the Dow to the low 8,000s again.

The UK reported larger than expected economic contraction of .5% in the third quarter, feeding the concern of a global recession amidst the credit freeze. And the result is a further slide in oil prices to below $65 per barrel. A 1.5 Mbd cut seems big enough to me to bring balance to the oil market unless the global economy deteriorates a great deal further. One of the reasons the price fell is a critical eye toward OPEC’s announcement. It is hard to enforce a cut in production by numerous states (some have cheated in the past) so many traders will want to see the cut to believe it. Also, oil demand should increase in the 4th and 1st quarters as Northern Hemisphere winter heating needs grow. And price-induced demand reduction in the US may decelerate as the nationwide pump price falls toward $2.50 per gallon. The oil demand level will depend on how deep the economic downturn goes.

So far, the recession has sent almost all commodities reeling. Australian coal for export has fallen below $100 per ton after flirting with $200 a few months back. And US natural gas is less than half its mid-summer high at ~$6.25 per MMBtu on the projection of lower demand by industrial users. Greenhouse gas emissions will probably fall significantly over the next several months thanks to lower demand for fossil fuels. And it is up to us to ensure that economic recovery in 2009 and beyond is based on an efficient and clean energy infrastructure. Such a recovery can be a sustainable engine for jobs and growth without compromising the long-term importance of lowering emissions or the medium term threat of more record energy prices.

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