OPEC to cut output; prices fall anyway
OPEC controls 40% of the world’s oil production, but Friday the cartel was just one more hoarse voice on the trading floor, straining to be heard above the din of another day of steep stock market declines.
After an emergency gathering in Vienna, the Organization of the Petroleum Exporting Countries announced plans to cut production by 1.5 million barrels a day in a bid to stabilize prices. Light, sweet crude, the U.S. benchmark grade of petroleum, has plunged in price by more than 50% since oil’s record high above $147 a barrel in July.
“Oil prices have witnessed a dramatic collapse -- unprecedented in speed and magnitude,” the 13-nation cartel said in a statement reflecting concern about a growing oil glut. “This slowdown in demand is serving to exacerbate the situation in a market which has been oversupplied with crude for some time.”
But it wasn’t clear that anyone heard the message OPEC intended to send, analysts said. Crude oil for December delivery dropped $3.69 to a 16-month low of $64.15 a barrel.
Some experts said that worries about a worsening global economic slump drowned out all other considerations Friday.
“The markets are just freaking out,” said James DiGeorgia, editor of investment newsletter Gold and Energy Advisor. Stock markets sank sharply around the world, and the Dow Jones industrial average plummeted more than 500 points before recovering slightly to end the day with a loss of 312.30 points, or 3.6%, to 8,378.95.
“On a day when the Dow was off this much, this lack of a reaction to OPEC does not surprise me,” DiGeorgia said. “Virtually all of the speculators have either sold out this market or they are betting their shirts on the downside trend.”
Some analysts disagreed, saying OPEC helped grease Friday’s oil-price slide rather than apply the brakes as it had hoped.
“They could have said that they were concerned about a global recession and that they would make sure there would be enough cheap oil available to help spur an economic resurgence and rally the stock markets,” said Phil Flynn, senior market analyst for Alaron Trading Corp. “Instead, they shot themselves in the foot. All they did was add to the panic.”
Perhaps even worse for the cartel, Flynn added, might have been the damage done to its precarious image. At a time when world governments are straining to bolster confidence in their wobbly financial institutions, ease tightening credit and boost slowing world trade, OPEC risks projecting an image as a group that is concerned only with what it can squeeze out of the situation.
“The cartel has become a synonym for greed in the eyes of this market,” Flynn said.
One who was clearly tired of such guilt by association Friday was 25-year gasoline station owner Aziz Taghizadeh, whose SP Super Petrol gasoline station sits at the busy intersection of Venice Boulevard and Sawtelle Avenue, at the boundary between Los Angeles and Culver City.
A hand-painted sign that said “special price today” announced that Taghizadeh’s station was undercutting the state average for a gallon of self-serve regular gasoline by about 24 cents at a price of $2.97. Motorists brought boxes of cookies as thanks. One even gave him a gold coin, he said.
“Today, I make people happy,” Taghizadeh said.
Yuri Gorochovsky was thrilled. The senior vice president of an aircraft company called Air Support Systems had parked his Mercedes sedan this year in favor of a 2001 Geo Tracker.
“This is unbelievable. I like it,” said Gorochovsky, who earlier in the day had decided that the tour of L.A. he was giving to a friend from Las Vegas needed to include a gas station selling fuel for less than $3.
The station was providing a little guilt-free muscle-car action for British tourist Ian Armstrong, who was capping off a three-week Southern California vacation by tooling around town in a sleek gray Mustang GT rental car. Armstrong noted that gasoline in his native Birmingham, England, has sold for the rough equivalent of $10 a gallon.
Gasoline under $3 was “a good feeling,” Armstrong said, particularly because “your cars aren’t so economical over here.”
Analysts differed over whether OPEC would be able to prop up the price of oil and keep stations like SP Super Petrol a rarity in the state.
Fadel Gheit, senior energy analyst for Oppenheimer & Co., said OPEC wasn’t reaching nearly deep enough with a 1.5-million barrel cut when it was already producing more than its own 29-million-barrel-a-day quota.
Noting that the Energy Department reported this week that U.S. demand fell in 38 of the last 42 weeks, Gheit said, “There is a gash in this dike, and they are trying to put a finger in it. With demand falling like a rock, this is not big enough to turn things around.”
Others said oil couldn’t possibly remain this cheap for long.
Joe Hahn, who does energy price modeling as an assistant professor at Pepperdine University’s Graziadio School of Business and Management, believes that OPEC will be forced to make cuts until oil prices begin to rise again.
“I would love to be wrong. I love to see this when I fill up my car, but oil will be back in the $90 range by the late first quarter or the early second quarter,” Hahn said.
“OPEC will not stand still. There will be more cuts to come if prices continue to be this low.”