The Price Of Oil Will Rise

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The amount of humiliation among OPEC oil ministers must be agonizing. Every time the cartel cuts supply, the price of crude drops like a rock. But, the ministers will not be denied their pound of flesh.

The most recent cut in production was either 4.2 million barrels a day or 2.2 million, depending on what month is considered as the starting point for the calculation. Either way, the supply from OPEC should be down about 10% from the middle of this year to the early part of 2010.

The enemy of these price cuts has been rapidly falling demand in recession-riddled economies like the ones in the US, EU, and Japan. Even China is using less oil. Crude prices dropped after the most recent OPEC cut announcement because America suddenly determined it had more supply than most analysts thought.

The great thing about being a supplier is that cutting never ends. Cut once without effect and then cut twice. Cut three or four times. At some point the cuts get supply below demand and prices start to move north.

OPEC has not be very good at anticipating supply contraction. The recession came on too fast. But, the one certain thing about the cartel is the its members are feeling poor and they will press for cuts until oil gets above $70. The national budgets of Nigeria, Iran, and Venezuela depend on it. Saudi Arabia cannot even build its new King Abdullah Economic City. The man is an emperor after all.

Russia in not in OPEC, but it might as well be. Its stock market has fallen 85%, to a large extent because oil revenue is falling. Vladamir Putin, the troll who used to run the KGB, could be out of a job as the head of the Communist country.

Too much is at stake for oil prices to keep dropping, so they won’t be any more.

Douglas A. McIntyre