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September 10th, 2008

OPEC to Cut Production, Oil Prices Likely to Hold Steady

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Just prior to the Organization of Petroleum Exporting Countries’ meeting yesterday, oil prices fell to nearly $103 a barrel. OPEC’s decision to reduce production by approximately 500,000 barrels a day is both a response to reduced global consumption as well as an attempt to create a bottom for oil prices, at least for now:

At a news conference after the meeting, (OPEC President Chakib) Khelil said the group was merely responding to oversupply.

“My hunch is that prices will be going down despite the decision,” Khelil said. “There is an oversupply; everybody agrees about this.”

The decision represents a rare case of OPEC’s going against the position of its biggest member, Saudi Arabia. The Saudi oil minister had said when he arrived in Vienna early Tuesday that the market was “fairly well balanced.”

“We have worked very hard since June to bring prices to where they are now,” Naimi told reporters Tuesday morning. “We have been very successful.”

According to OPEC, the group is merely maintaining production projections set set back in September of 2007. Yet, just because OPEC says they will aim to reduce daily production by a half-million barrels a day, does not mean the group will stick to those figures:

Given OPEC members’ history of frequently pumping more than their quotas, it is not certain that they will abide by the new agreement.

Ali al-Naimi, the oil minister of Saudi Arabia, which has been pumping more than its quota in recent months, left the meeting without comment. With crude oil heading down toward $100 a barrel, Saudi Arabia and other producers had suggested before the meeting here that OPEC would keep pumping at full tilt, even as some members of the cartel expressed concerns about rapidly declining prices.

Oil prices have fallen nearly 30% since they peaked at nearly $148 in July. High gas prices have led to a significant decline in US consumption. According to the International Herald Tribune, US consumption is down a million barrels a day from last year. “We should still see some decline in (gas) prices, just more slowly,” said HSH Vice President Keith Gumbinger.

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3 Responses to “OPEC to Cut Production, Oil Prices Likely to Hold Steady”

  1. Rebecca Wilder Says: September 10th, 2008 at 4:25 pm

    Interesting that OPEC cutting oil production by 500k barrels/day would have literally no affect on oil prices (WSJ quotes $103.09 as of 4.23pm, which is probably at WTI price). But back in June, a strike in Nigeria that put 300k barrels/day at risk sent oil surging.

  2. Tim Manni Says: September 11th, 2008 at 10:10 am

    Rebecca — I hear you! I recall you brought up before when a BP pipeline was blown up in Russia it had absolutely no affect on prices. After the announced OPEC cut prices have held steady at around $103. In my opinion it’s all up to consumers to continue their reduced consumption in order to keep prices low. Oil producing countries will never let prices skyrocket again — they want to keep dependence focused on oil rather than alternative fuels and hybrids.

  3. Rebecca Wilder Says: September 11th, 2008 at 3:11 pm

    Let’s see, if the price of gas falls back, what will consumers do? Will we learn our lesson? History says no. Two huge oil shocks in the 1970’s led to precipitously rising inflation (with other macroeconomic issues already in place), and twenty years later, we are still buying big trucks, spending on new roads rather than public transportation, leaving our lights on all day, and only some of us buy energy-efficient appliances (you can get me to, but only if it is on sale). OPEC must love America! Thanks, Tim.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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