OPEC announced cuts on production, but oil prices continue to slide down. Cuts were meant to stabilize prices between “$70 to $80 at least”, after the nearly 70% plunge since hitting $147.27 in mid-July.

Crude Sweet Oil, Dec 2008

Crude Sweet Oil, Dec 2008

Production will be reduced by 2.2 million barrels/day, which along with a previous announcement will bring production down from September levels by 4.2m barrels per day. With the cuts, OPEC nations will produce about 24.8m barrels a day, about 40% of the world’s oil. That is a 15% drop. And still prices go down.

To put in perspective: this daily reduction represents 1/5 of US daily consumption. And still prices go down.

Why? Some say it was the U.S. Energy Information Agency report that crude oil inventories increased by 500,000 barrels from the previous week, when analysts had expected to see a decline of 900,000.

First, what kind of clueless analysis expects a decline of 900,000 then reality gives you an increase of 500,000? Second, the increase was of 0.15% (total inventories are at 321.3 million barrels). That can’t explain price drops.

I think we are seeing the slingshot effect typical of speculative pricing. Oil prices detached from supply-demand boundaries for the last two years, letting prices go up through the roof; now prices are overshooting on the other direction, dropping below real prices are speculators use economic downturn as trigger for selling futures.

Back in May, Nobel-prize winner Paul Krugman insisted there was no oil bubble, and that prices were up solely due to supply and demand.

Hindsight is 20/20.