OPEC To Cut By 4.2 Million Barrels A Day, More Than Twice Expectation

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So much for deflation worries, and so much for an early end to the recession.

OPEC shocked the market by saying it will cut production by 4.2 million a day. Most comments from the cartel and analysts said the drop was supposed to be 2 million barrels.  After a further look, that 4.2 million barrel per day number may be misleading.

A number of OPEC members, particularly Venezuela and Iran, have saidthat they cannot balance their national budgets. The organization couldhave cut modestly now and watched for the effect on prices. If thecartel saw no "improvement" in what it could charge, it could dropsupply again early next year.

OPEC has clearly decided to preempt the issue and take daily outputdown sharply. Russia is likely to follow and the impact ofpricing will be made even greater, although it appears their output is already down. The large increase in oil inventories rather than the expected decrease shown this morning is also counteracting the headline data.

If the headline data was the only data, then you might have expectedto see $60 by the end of the year and to $70 by the end of winter.  Butif you look further into the cuts, this cut in production is from theSeptember levels.  If that is true, then the additional OPEC productioncuts would look more like 2.2 million barrels per day starting inJanuary.  That is why oil futures have whipped around and are back innegative territory around the $43.00 per barrel price.

Source: CNBC

Douglas A. McIntyre