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OPEC will meet on Sunday in Vienna to decide if further cuts in output are needed to prop up falling crude prices. Some ministers have expressed concern that prices could slide further as global energy demand deteriorates. Accordingly, oil prices surged late this past week as market participants began to price in a possible cut; specifically, crude futures edged higher on Friday, as New York’s main futures contract, light sweet crude for delivery in April, climbing 41 cents to $47.44 a barrel. And in London, Brent North Sea crude for April rose 70 cents to $45.79 a barrel.

That said, the market may have overshot. The International Energy Agency (IEA), for example, which represents oil consumers, stated that a further cut in output would accelerate the global economic crisis. Moreover, Bloomberg reports that OPEC is unlikely to limit production further because existing cuts have succeeded in tightening supplies as demand falls, according to an unnamed official. While OPEC argues that oil prices need to remain at levels that support energy investment across the supply chain to help sustain longer term economic growth, there is little consensus as to precisely what level that is. Additionally, further cuts may ironically cause the price of oil to plummet further if the global economic crisis persists.

Richard Savage, Head of Energy Research for Mirabaud & Cie, a private Swiss banking firm, noted over the weekend at a conference held in Oman that oil’s $147/barrel peak last July was driven not by fundamentals but by “the same surfeit of liquidity that drove other asset classes to unsustainable highs.”  The withdrawal of said liquidity, he stated, means that “the market is once again being driven by fundamentals, and with inventories at near record levels and OPEC sitting on 5 million barrels of spare capacity, we do not expect a recovery anytime soon.”

Savaged continued that in his estimation, once the price of oil does eventually rally, “we do not see a return to a $100+ per barrel world.  We believe a $75 per barrel oil price is high enough to incentivise all but the most expensive producers; it is high enough to encourage investment in alternative energy sources; and it is high enough to put a break on the explosive demand growth that was the catalyst for the last oil price rally.”

The current account surplus of $400 billion among the Middle Eastern and North African oil-exporting states will turn into a deficit of $30 billion this year, according to the latest IMF report, which classifies said exporters as Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the U.A.E. and Yemen.

That said, according to IMF Middle East and Central Asia Department Director Masood Ahmed, “for most countries, this deterioration is from a position of significant strength, and thus can comfortably be sustained by the large stock of reserves that these economies have built up.”  Riyadh-based investment bank Jadwa Investment, for example, stated that Saudi Arabia’s net foreign assets of roughly 433 billion dollars gives the Arab world’s largest economy “an advantage over most other countries in alleviating the impact of the extreme financing pressures.  It can push ahead with strategic projects such as key infrastructure, oil, power and water, and support the private sector where necessary.”

But this is not to suggest the collective regions are in the clear.  Risks to the outlook for the countries in the region include the following, said Ahmed:

“First, if oil exporters cut their long-term oil price expectations and, consequently, their spending, growth prospects would be weaker for the entire region. Second, a more prolonged global recession would imply even weaker exports, tourism, and remittances for most emerging markets and developing countries. Finally, if asset price corrections deepen and the impact of asset price corrections feed through to corporate and, ultimately, bank balance sheets, some financial institutions in the region may be under stress.”

May 14, 2008: “The price of oil is unlikely to fall significantly from near-record highs and could rise further still as demand from Asia and the Middle East outstrips falling demand from the faltering US and European economies,” the International Energy Agency (IEA) said.

October 24, 2008: “Oil options contracts to sell crude at $50 by December almost tripled today after an OPEC decision to slash production failed to allay concerns that the global economic slump is hurting demand.”

Timberrrrr!

Timberrrrr!

What went wrong?  IEA Director Nobuo Tanaka said that his organization has yet to see any decline in emerging markets oil demand and predicts 5.2 percent growth in Chinese oil demand next year.  “Our statistics clearly tell us there is not yet any indication of slowdown in China, India or the Middle East,'” Tanaka said recently. “Their demand is still very robust.”  Yet the price plunge reflects just how awesome the demand drop has been elsewhere.  In response, OPEC decided at its Vienna headquarters today to lower the production quota for 11 of its members by 1.5 million barrels a day.  However, because world demand is expected to fall to as low as 83.5 million barrels a day in the second quarter of 2009, from 85.7 million barrels a day last quarter, according to Morgan Stanley, the net effect will be a continued fall in price.  “We are going to see a significant dip in demand that will be most severe in the second quarter,” Sadad Al-Husseini, a Morgan Stanley consultant and former head of exploration and production at Saudi Aramco, said on a conference call Thursday.  Echoed Deutsche Bank AG’s Chief Energy Economist Adam Sieminski:  “We predict the price could fall further, to $50 a barrel by 2010.”

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JGW

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