I suspect that current spot weakness (compared to a 1-year forward price around $65) is a function of limited credit for working capital and margin for futures trades. Oil isn’t being stored because the financial firms formerly in the commodity storage game (Lehman, UBS, Morgan Stanley, Goldman) are either gone or curtailing their participation. Therefore, the marginal barrel now has to hit the spot market rather than go into storage. Combine this with lower Chinese storage subsequent to the Olympics, and, yuck. Ugly.

In short, it’s possible that spot weakness is a function of the credit crisis instead of anything related to supply/demand. If this is true, Opec can certainly cut production, but their ability to control prices is limited. Perhaps if they financed inventories…

Let’s say you’ve overbuilt your oil production capacity AND expanded your domestic population/infrastructure based on oil revenues.

In a declining consumption market you can:

A. Cut production and hope the other guys selling oil do likewise to increase the price (before you go broke).

B. Keep production steady, cut back on expenditures and hope the market rebounds (before you go broke).

C. Increase production to undercut the other players in the market, in the hopes that you can get more market share and drive them out of the business (before you go broke).

D. Form a global cartel.

E. Re-price oil sales in some useful commodity and hope the world’s superpowers don’t “liberate” you.

F. Bid up the price of oil futures and sell enough future production at artificially high prices to cushion the landing, then point and laugh as all the other (alternative?) energy producers go broke.