OPEC to Hold another Discussion in Cairo

If you meet enough times, maybe the oil price will stop dropping. That might be the principle which OPEC is operating. According to reports, the producers' club will set a meeting in Cairo on Nov.29, widening a previously scheduled meeting of Arab oil ministers. Arab oil ministers’ conferences seldom produce anything of substance but a broad Cairo confab might issue new announcements of cuts-perhaps 1 million barrels per day or more. OPEC has not officially announced the meeting.

If this meeting happens, it will come only a month after OPEC had an emergency meeting in Vienna and reported 1.5 million barrel per day in cuts. There are signs that those cuts are being at least implemented partially. It will also be only two weeks before yet another planned meeting in Algeria on Dec.17.

OPEC, which was on sleep mode for years during the price increases, is now trying to show it is waking up and is managing actively the markets. But so far, the markets haven't been impressed. Damaged by an ever more worsening world economy, prices have dropped by about 60% since the $147 per barrel on mid-July peak. Oil continued its plunge this week, going through $55 per barrel for US light crude on Nov.13. Word of OPEC's new plans gave a brief lift, with prices at $56 per barrel midday on Nov.14. But downward pressure remains strong.

The reason for the price drops is no secret. With the global economy imploding, demand is vanishing. Wood Mackenzie, the Edinburgh-based industry consultants, is now predicting an annual decline in demand for 2009. This is the first since 1983. John Waterlow, an analyst with the group, is forecasting oil demand to actually fall in 2009 by 250,000 barrels per day as the world economic crisis and the continuing effects of high prices control consumption.

Supply is expected to increase only slightly by about 100,000 barrels per day, as oil companies control spending and struggle to find financing. Due to such numbers, OPEC thinks they have no choice but to slash and often to try to keep up with the fall in demand.

OPEC's salvage the prices

In September, OPEC officials were aiming for a price of somewhere between $80 to $100 a barrel, depending on whether they were hardliners such as Iranians or Venezuelans or of the more pragmatic Arab Gulf state persuasion. Now they are discussing hopes to salvage things at around $70 per barrel.

If there is a bright area for OPEC, it is that the markets don't seem to believe that low prices are here forever. The forward price for oil five years out remains in $80 per barrel range, probably reflecting market participants' belief that supplies will be tight when the world economy recovers. But until then OPEC is going to struggle to keep prices from heading into the dreaded $30s-$40s per barrel range.

In fact, in some respects the OPEC countries are already there. The OPEC basket price, which more closely reflects what OPEC countries are receiving than the more commonly quoted U.S. light crude price, was actually $47.73 per barrel for Nov.13