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Friday, December 5, 2008

CRUDE OIL - How Low Can It Go?

CRUDE OIL - How Low Can It Go? By Zhuge Liang



Scared Straight! Is that what the OPEC President Chakib Khelil was trying to do when he told the whole world that oil might not have a bottom and there is no floor? Was he sending a message to the oil producers of the world that they had better make drastic cuts in production or then they face a world with a bottomless oil price! Oh My!

So much for the brashness of Chakib Khelil who went from being a guy who just a few months ago was telling the world that he wanted to defend $80.00 a barrel. And in the beginning of this month he said that $70 to $90 a barrel was OPEC's target but now says that there is no floor. In an interview with a Spanish radio station, Khelil said that prices can drop to a very, very low level and that it depends on supply and demand conditions, inventory levels, and also the future of global economic growth. Khelil said the fact that the forward demand cover for oil (which is the number of days of consumption held in total stocks) is currently 56 days, compared to an average of 52 days over the past five years, an excess of around 320 barrels of oil. In other words, global supplies are the highest they have been in years and with the continuing economic crisis, unless the world oil producers make drastic cuts in production, the floor will fall out like a Graviton. This is what he might have said had he ever been on a Gravitron.

Well Chakib was indeed stating what is now obvious to the market but was he doing it for our benefit or his own. Was Chakib trying to shock and awe world oil producers out of a sense of denial on what they are worth and ultimately what a barrel of oil is worth? Is he ramping up the pressure on the lying and cheating Iranian government and Venezuelan government or is it more aimed at some of the non-OPEC world oil producers like Russia, Mexico and Norway. Is he trying to tell these OPEC members that we are all in this together? Did he try to infer that they all face economic doom if they do not act quickly and decisively? Khelil said back in October that non-OPEC members should cut their oil output to stabilize dropping oil prices. He said that if the countries, namely Russia, Norway and Mexico, do not lower production, OPEC’s decision will be more difficult, requiring further sacrifices on the part of the OPEC. Was he saying that if you cannot beat us you should join us?

Well that is exactly what he was saying. Mr. Khelil called on Russia, Norway and Mexico to join OPEC. Khelil told the APS news agency that, “What we really want is for these countries to become members of OPEC." He said that, “I don’t see why Russia can’t be a full-fledged member of the organization. It’s the best way to express solidarity.”

Well I can see why, Chakib. It is because ultimately, as a free agent, they are free to join you on cuts when they want and not join in when they do not want so they ultimately have more power. Khelil added that Russia, Norway and Mexico should cut oil output if they refuse to join OPEC to help halt a slump in global crude oil prices.

Still the Russians said that they would cooperate with OPEC but will it be the type of cooperation that will be enough to stop the downward onslaught?

Yesterday the EIA report showed a draw in crude but in the key Cushing, Oklahoma delivery, a big build! Yes Virginia that is why crude did not hold the rally. That and the fact that the demand numbers are still downright recessionary.

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