OPEC's Surprise Announcement Gets Big Yawn

OPEC is struggling to get prices up. To achieve that result OPEC Agrees Larger-Than-Expected Cut

OPEC, supplier of more than 40 percent of the world�s oil, agreed to cut production quotas by a larger- than-expected 9 percent to revive prices as a global recession reduces demand for crude. �OPEC is sending a message that they are trying to cut pretty seriously,� said Mike Wittner, head of oil research at Societe Generale SA in London. �If they need more cuts, there will be more cuts.�

Market Greets OPEC's Surprise Announcement With Big Yawn

OPEC may be sending a message but the market sent a bigger one as Crude prices tumble despite record OPEC cuts.

Here's how bad things are for OPEC these days: It announced its largest-ever production cut Wednesday and oil prices promptly slumped to $40 a barrel, the lowest level in more than four years.

Ministers of the 13-nation oil cartel were trying to shock moribund markets into life by slashing output 2.2 million barrels a day, more than double two recent production cuts. "I hope we surprised you," said OPEC President Chakib Khelil when asked whether the move would send prices upward.

Instead the markets yawned and there appeared to be more good news for consumers -- at least for the short term. Benchmark crude prices tumbled to $39.88 per barrel Wednesday, levels not seen since July 2004 on the New York Mercantile Exchange. In just five months, crude has given up all the price gains made over the past four years amid an oil glut and the spreading recession.

Meltdown 101

Here's a little Q&A on Why OPEC moves aren't hitting prices.

Q: What exactly did OPEC decide to do Wednesday?

A: As expected, OPEC powerhouse Saudi Arabia said the group will slash a record 2.2 million barrels from its daily production as of Jan. 1, while Russia and other OPEC outsiders announced their own cutbacks of hundreds of thousands of barrels.

Combined with previous cuts announced in the past few months, OPEC is taking 4.2 million barrels a day off the market compared to September levels.

Q: How did the market react to this move?

A: Oil prices fell. Light, sweet crude for January delivery fell below $40 a barrel on the New York Mercantile Exchange for the first time since 2004.

Q: Wouldn't a cut in production usually increase prices?

A: You can cut supply all you want � but as long as demand drops even more sharply, prices are unlikely to rise. And demand for oil has crumbled amid the global economic downturn.

"Frankly, the market doesn't believe that OPEC can cut production by 2 million barrels a day," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "It questions whether OPEC has the ability to adhere to the cuts."

Q: Aren't plummeting pump prices encouraging Americans to use more gas?

A: Even as gasoline prices have fallen to their lowest levels in nearly four years, money-conscious Americans have sharply curtailed their driving, logging 9 billion fewer miles on the nation's roads in October than they did a year ago.

Crude Futures Monthly Chart



Unleaded Gasoline Futures


Crude prices are back to where they were in 2004 and a spike high in 2002 all in a matter of 5 months. Unleaded gasoline futures show a similar fate.

OPEC threw a surprise to shock the markets. The oil shock was on OPEC.

This is actually a very bearish development and a confirmation that demand is extraordinarily weak. The oil producers are going to have to cheat excessively to bring in the money they need to fund their economies. And cheat they will.

Regardless of what the dollar does, do not expect oil to be blasting higher anytime soon. On the other hand, should the dollar retrace any of the huge declines vs. the Euro, a situation I find highly likely, all commodities will likely be under some pressure.

$XEU Euro Monthly



click on chart for sharper image

The Euro may be attempting a backtest of the broken uptrend line as shown.

Fundamentally, I doubt Trichet's bluff of no more rate cuts will last much longer. If so, expect to see the Euro rally stop in its tracks, and expect to see continued weakness in oil and other commodities (all other conditions being equal).

And as long as we are discussing surprises, I simply have to ask:
Given that it's Options Expiry Thursday, is it time for a surprise announcement of an Auto Bailout?


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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