Monday’s stock market rally resulting from the coordinated worldwide recapitalization of the banks lasted all of 24 hours until the reality of the deteriorating world economic situation set in and sent stocks tumbling. During the rally, oil, which opened the week at $80, climbed briefly to $85 and then slipped to close at $74 on Wednesday as the Dow Jones fell 733 points. Oil prices have now fallen 50 percent and are back to levels last seen in September 2007.
A series of bad economic reports on Wednesday convinced the markets that recapitalizing the world’s banks will not be enough to forestall the oncoming recession.
If there is to be any growth in the demand for oil in the near term, it will have to come from China, but recent import figures suggest that demand from there also will be dropping.
Attention now shifts to OPEC and the meeting which is still a month away. The conventional wisdom now says that OPEC (read the Saudis and close allies) will cut production by 1 million b/d in addition to the 500,000 b/d cut agreed upon last month. Prices are dropping rapidly and the OPEC price hawks – Iran, Libya, and Venezuela – are already starting to hurt. At the current $74 per barrel the average price that OPEC members receive for less than top quality crude is now in the mid-$60s.
If the economic situation turns really sour and worldwide demand plummets, modest production cuts of a few million barrels will not be enough to restore prices to levels that will satisfy the needs of the current OPEC state budgets. Some are already talking of OPEC falling into disarray as price hawks refuse to cut production and attempt to throw the entire burden on the Saudis.
Although the prospects for what is now being called a “deep recession” are overshadowing all other developments relating to oil, yet another hurricane has forced the closure of the 525,000 b/d refinery on the Virgin Islands; the Nigerian oil workers union is threatening a strike; and electricity shortages in Pakistan and India continue to grow worse. Exports from the Persian Gulf are reported by Lloyds as having dropped by 840,000 b/d in September and finally, the US State Department reports that the underwater pipelines Iraq uses to load oil for export are in such bad shape they could fail at any minute.