Oil Expert Verleger: OPEC Needs 7.7 MBD Cut to Restore Supply/Demand Balance

Although the spot oil prices and oil stocks have rallied on word of a pending 1.5-2 million barrel a day cut by OPEC in pil production, oil maven Philip Verleger says it won’t be anywhere near enough.

From Platts (hat tip reader Michael):

In his widely-read weekly analysis, “Notes at the Margin,” energy economist [Philip] Verleger suggests that OPEC should execute an “astounding 7.7 million barrels per day” just to restore market balance today.

Here’s why, according to Verleger:

-Global demand is down in December year-over-year by 5.2 million b/d to 81.6 million b/d, from 86.8 million b/d.

-Non-OPEC production is projected at 49.4 million b/d, with OPEC NGLs at 5.2 million b/d, and processing gain at 2.3 million b/d.

Verleger says that after adding those numbers, the call on OPEC is at 23.7 million b/d. By contrast, Platts’ estimate of OPEC production in October was 32.26 million b/d, before its recent cut of 1.5 million b/d reached at a meeting in November. A call of 23.7 million b/d would stand in stark contrast to the IEA’s estimate of a fourth quarter call of 31.1 million b/d and a full 2009 average of 30.4 million b/d.

“The implication, then is that OPEC countries need to reduce quotas not by one million or two million barrels per day, but rather by six or seven million barrels,” Verleger says in his report. “Since cuts of such magnitude are out of the question, one should expect prices to come under further downward pressure.”….

In an interview, Saudi Oil minister Ali Naimi said that global inventories were “a little too high at 55 days of forward demand cover rather than the apparent target of 52 days.” But Verleger says in his report that while OPEC officials think global stocks cover 55 days, the correct number is probably between 61 and 62 days, far more than the International Energy Agency has estimated. In fact, the cover may still increase by the next meeting.

“By OPEC’s next meeting, global stocks may cover 65 days of forward consumption,” Verleger said. “This, I believe, would be a record.”

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  1. joe c

    Right, though actually that’s a little low. If you look at the 79-83 slow down, demand dropped around 13%, that would equate to around 11.5 million barrels today. However it looks increasingly like this slow down will be worse, so you could say 12 million plus, needs to be cut. That’s not going to happen.

    The oil scenario certainly makes a strong case for deflation. I dont think we really understand deflation, nor does our illustrious Fed chairman.

    Well, place your bets we’ll see, there’s certainly a lot of money sloshing around out there and ever increasing amounts of oil and other commodities with a precipitous fall in demand.

  2. Bob_in_MA

    I read (OK, on Wikipedia) that the oil sands in Canada are break-even at $28, so I would guess they start closing down in the mid 30s, but they are just 1-2m b/d.

    Maybe we can all buy in at the same price Jim Rogers did in the late 1990s! ;-)

  3. www.gregor.us

    Phillip Verleger is a kook. His only aim is to make the most impossible, hyperbolic market calls to draw attention to himself. He’s been doing this for years. For example, he said after Bush’s SCOTUS speech on biofuels in 2007 that ALL global growth in demand for oil would be met by biofuels in the years ahead, thus “leaving the call on oil, flat.”

    And it just gets sillier from there.

    This financial crisis ends when people like Verleger get taken out. Please, no more quotes about the world from Verleger, Greenspan, and so on. These people need to go away

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