Oct 18, 2006

OPEC Cuts Oil Exports

To be successful i reducing world oil supplies, OPEC will require a united front from all 11 member nations. OPEC's existing production ceiling is 28 million bpd.

According to Tom Ashby of Reuters, three OPEC countries (Iran, Venezuela and Indonesia) have not produced up to their individual OPEC quotas. The other 8 OPEC countries have either met their individual OPEC quotas, or in the notable cases of top exporter Saudi Arabia and Algeria have significantly topped their production limits.

Going into the October 19 meeting in Qatar, most analysts agree that the overall OPEC production cut should be proportioned among member countries based on their average actual output level over the past 12 months. Without this approach, Saudi Arabia would suffer the most from a percentage cut imposed across-the-board to all member countries.

OPEC's failure to agree on an oil quota will weaken its stature as the world's foremost agency with power to influence crude oil supplies.

Late on Thursday, October 19 OPEC agreed to cut output by 1.2 million bpd at its emergency meeting in Doha, Qatar.

However, the market didn't believe that OPEC member countries will be able to implement across-the-board production cuts. OPEC countries have a history of cheating on production quotas, by flooding world markets with oil when prices are high. Therefore many equity analysts are betting that OPEC member countries will overproduce.

As a result, the price of oil fell to an 11-month low below US$57 for the week ending October 20.

Because OPEC member countries don't always work together to control oil production output, prices aren't strictly tied to OPEC decisions. Instead, market psychology and simple laws of supply and demand determine oil price futures.

And let's not forget George W. Bush, who many analysts say has a strong say in oil prices, albeit behind the scenes.

Personally, I have bought 200 shares of Imperial Oil (IMO on TSZ and NYSE) at C$36.20 and C$35.20. My thinking is that if the OPEC quota goes through then oil stocks will stage a brief rally. If not, I plan to lock in half profits before the October 19 meeting. There are many other factors that influence the price of oil like natural disasters, threats of war with Iran and Nigeria's rebels. To me, the price of oil and oil company shares look low.

Oil remains a valued commodity in international trade, and the upcoming winter looks to be a cold one. At least so far in October in Canada.