Has OPEC stopped the slide?

The Opec cartel, which controls 40 per cent of the world’s oil production, last week announced a further 2.2m barrels a day cut, on top of the 2m b/d reduction pledged this year. The market participants waited eagerly to find out what would be the reaction of oil price due to the cut. There was a hope that the cut will result in stopping the slide of oil prices. It seems that the slide in the oil price did not abate but worsened...

FT.com: Was Opec successful in stopping the slide in oil prices? It depends on how you analyse the numbers.

A look at the Nymex front-month West Texas Intermediate contract, the oil market’s main benchmark, gives the impression of Opec failure. It plunged from $43.60 a barrel ahead of the meeting to close at a 4½-year low of $33.87 at the end of last week. A drop of $10 sounds very much like a vote of no confidence in the cartel.

This view is, however, misleading. The Nymex WTI front-month benchmark – in this case, the January contract – expired last Friday, distorting prices. The February contract, which on Monday became the market’s benchmark, was far more stable, losing $2 to $42.36.
But even this measure is incomplete. To attain a fairer view, it is necessary to dig deeper into the world of physical crude oil contracts.

As the cartel pumps mostly lower quality, heavy sour crude, the cuts will affect those grades first. It is there where the market should look for clues about the impact. It seems to be working. The price difference between lower quality, heavy sour crude, such as Dubai – the Middle East benchmark – and higher quality, light, sweet oil, such as WTI, has narrowed sharply, pointing to a tighter market.

And it is not just Middle East grades. JBC Energy, the Vienna consultants, says that American lower quality grades have recently shown their best side. In the US, medium grade Mars oil is now priced at its highest level in about 1½ years against the WTI benchmark. In Ecuador, Napo oil has also recovered.

Opec still faces a daunting job delivering its promised cuts amid fast-weakening demand, but investors should not disregard the cartel because the WTI January contract was weak.

For the time being, the physical market is giving Opec a cautious thumbs up. The drop came in spite of Opec’s production cut last week and assurances by Saudi Arabia, the world’s largest oil producer and the group’s leader, that Opec will implement the cut fully.

* Picture above courtesy of ChinaDaily.

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* Crude oil price for February 2009 is currently trading at USD39.45 per barrel in the Singapore market.

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* Despite the indices showing uptrend, the quantity traded is uninspiring.