OPEC Cuts May Have Succeeded in Creating Floor for Oil Prices

Rueters reported today that the substantial output cuts implemented by OPEC over the last six months might have succeeded in stopping the slide of oil prices.

Since September of 2008, OPEC nations have agreed to production cuts that amount to a 4.2 million-barrel-per-day reduction of total crude output.  The remarkable aspect of that enormous reduction is that, contrary to the pattern of history, OPEC member nations are actually going through with them.  According to a Reuters survey, four-fifths of those agreed-to production cuts are already in effect, meaning that the long-held OPEC tradition of “cheating” on output quotas is gone, at least for now.

Two major factors serve as proof that OPEC output cuts have resulted in a significant reduction in worldwide oil supply: the strong price of “sour” crude and the decline of stockpiles in major oil-consuming nations.  When reducing their output, OPEC producers tend to cut back production of “sour” and “heavy” oil (the terms refer to high sulfur content and high viscosity of the crude, respectively), which tend to sell cheaper than the “sweet” and “light” varieties.  Due to the reduction of supplies of these medium and low-grade crudes, analysts claim, Russia’s sour Urals blend has become more and more valuable on the world market.

Meanwhile, falling inventory numbers in major oil-consuming nations like Japan and the U.S. show that, despite still-dismal demand, more oil is being consumed in those countries than is being imported and produced domestically.

So what does the success of OPEC’s production cuts mean?  It means that the price of crude may well have found it’s low point–$40 a barrel, based on recent market trends—and will only move up from there in the future.  And while higher oil prices are usually not good news for the average consumer, a slowly rising (or at least somewhat steady) will go a long way in helping along the world economy’s comeback, which would be good news for everyone.