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Crying Time At OPEC? Price Crash Follows Cartel Punt on Production Quotas

Prices for U.S. domestic benchmark West Texas Intermediate (WTI) crude on the CME NYMEX futures exchange crashed $7.54/Bbl to $66.15/Bbl Friday (November 28, 2014) - down 11 percent since the Wednesday before Thanksgiving and 38 percent since their recent high in late June. International benchmark Brent crude prices on the ICE futures exchange fell 10 percent to $70.02 /Bbl over the holiday and are down 39 percent since June. The underlying cause is oversupply but the short term trigger for last week’s nosedive was OPEC’s failure to respond to falling prices at their Thanksgiving meeting in Vienna by reining in production. Today we discuss the fate of crude prices after the OPEC meeting.

We posted a blog on the recent crude price collapse back in October when prices were about 20 percent down on June – Brent was at $91/Bbl and WTI at $87/Bbl (see Crude Falls To Pieces). In terms of the fundamentals – little has changed since then. The root cause for the fall in oil prices is a worldwide increase in crude supplies coupled with a downturn in demand. Supply of crude from U.S. shale based production has been increasing at the rate of 1 MMb/d a year for the past three years - pushing out imports into the world market and creating increased competition among producers to retain their market share – especially since supply disruptions in countries such as Libya wound down.  On the demand side, economic recovery continues to splutter in most of the world and demand for oil is down or the same as it was a year ago.

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In the past two weeks the oil market started to place a lot of hope on the OPEC cartel – the 70’s era organization whose members control about 30 percent of world crude production. The economists calculated the oil price these countries needed to keep their spending habits fed. The implication seemed to be that OPEC members – set to meet Thanksgiving day in Vienna – would agree to cut their oil production in order to soak up the world surplus of supply over demand and bring the price back up over $100/Bbl again. But as we saw last week - all OPEC could agree to was to do nothing – holding production at current quota levels. The result was a predictable price lurch over the proverbial cliff to $66/Bbl for WTI and just over $70/Bbl for Brent. Figure #1 shows prices for WTI (blue) and Brent (red) since the start of June with Thursday and Friday’s crash circled in green.

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