UK: Renewed Calls For Opec To Cut Supply

Last Updated: 19 November 2008
Article by Bob Palmer

Oil prices continued to fall on Monday (17 November 2008) while the outlook for global demand deteriorates. This has prompted renewed calls for the Organization of the Petroleum Exporting Countries (Opec) to consider further production cuts over coming months at its meeting in Cairo later this month. This latest development is likely to be of particular interest to companies and investors within the oil energy sector, especially international energy groups working in Opec countries.

The decline in oil prices came as data from US commodity market regulators indicated that speculators on Nymex had made their most aggressive bet on falling oil prices since November 2005. Data from the Commodities Futures Trading Commission (CFTC) reveals that net shorts in crude oil had risen by around 40,000 contracts in the week up to November 11. Nymex December West Texas Intermediate dropped as low as $55.60, but later traded $1 lower at $56.02 a barrel. ICE January Brent lost 89 cents to $53.35 a barrel.

Interestingly, some commentators believe that if the price of crude oil stays around or below $50 a barrel for a sustained period, this will lead to a large spike in price in the later part of 2009, as the negative impact of a low price on the development of reserves will lead to a restriction in supply in the months ahead.

IEA's World Energy Outlook 2008

The drop in oil prices last week came after the International Energy Agency (IEA) reduced its demand forecasts for 2008 and 2009, illustrating the growing impact of the global economic crisis. On 12 November, the IEA launched its World Energy Outlook (WEO) 2008, the latest edition of the annual IEA publication. The WEO-2008 provides analysis to help policy makers around the world assess and address the challenges posed by worsening oil supply prospects, higher energy prices and rising emissions of greenhouse gases.

The IEA expects global oil demand to grow by 120,000 barrels a day in 2008, to 86.2m b/d, the lowest annual increase for 23 years. It expects the demand in 2009 to increase by 350,000 b/d to 86.5m b/d.

Future Opec production cuts

Several members of the oil producers' cartel are scheduled to convene on 29 November 2008 for a regular meeting of Arab ministers. However, the president of Opec, Chakib Khelil, insisted on Sunday that the November meeting would only be a preliminary session to prepare recommendations, which would then be discussed at the cartel's scheduled meeting in Algeria on 17 December. He stated that Opec would like oil prices of $70-$90 dollars per barrel which would match the marginal cost for new developments.

Opec's recent decision to cut production became effective on 1 November 2008. Some analysts have said the organisation would need to take 1-2m further barrels of oil out of the market to rebalance supply with falling demand.

Further reading

To view our related law-now article entitled 'Oil Tumbles despite OPEC Output Cut', dated 3 November 2008, please click here.

To view information on the IEA's World Energy Outlook please click here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 19/11/2008.

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