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.”