In a desperate attempt to stop oil prices from plummeting, OPEC has cut production far more than expected. So far, it hasn’t worked, possibly because inventories also jumped by a surprising 500,000 barrels. Give it time, however.
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.
A number of OPEC members, particularly Venezuela and Iran, have said that they cannot balance their national budget. The organisation could have cut modestly now and watched for the effect on prices. If the cartel saw no “improvement” in what it could charge, it could drop supply again early next year.
OPEC has clearly decided to preempt the issue and take daily output down by almost 10%. Russia is likely to follow and the impact of pricing will be made even greater.
Watch oil move over $60 by the end of the year and to $70 by the end of winter.