What’s Behind the Crash in Crude Oil?

Ironically, the two biggest cheaters in OPEC were the two most vociferous price hawks, Iran and Venezuela. After pledging to cut its oil output by 176,000 bpd in December, Tehran left its oil output unchanged at 3.83 million bpd, while Caracas actually increased its oil output by 20,000 bpd last month, after pledging to reduce output by 138,000 bpd. Riyadh cheated by 80,000 bpd last month. It’s hard to believe OPEC will meet its pledge to cut oil output by 500,000 bpd in February, when the December agreements have not been fully kept.

So far, Russian kingpin Vladimir Putin hasn’t joined the OPEC cartel in cutting oil production, and instead, is pumping oil at full speed. Putin’s lack of cooperation on oil production is creating bitterness within the ranks of OPEC, and might explain why most members of the cartel are cheating on their quotas. Oil production in Russia increased 2.1% year-on-year to a near record 9.75 million bpd in December.
Booming exports helped Russia’s economy expand by 7.3% in November from a year earlier, and 6.8% higher over the first 11 months of 2006. To fuel its booming economy, Moscow is diverting more of its oil production to meet domestic needs and exporting less outside of the CIS. Oil exports to countries outside the CIS fell to 4.16 million bpd in December, or 12% below the peak in June of 4.76 mil bpd.

Despite cheating by OPEC and record high Russian oil output, strong oil demand from Asia is expected to put a floor under crude prices at some point. Asia imports about two-thirds of its 24 million bpd crude oil needs, most of that from the Middle East. China surpassed Japan in 2004 as the world’s second-largest oil consumer after the United States. China consumed 7.4 mil bpd of oil last month, compared to US demand of 20.7 mil bpd, which was 25% of global oil demand.

“Oil demand should be in part driven by the number of automobiles in emerging Asia surging from 60 million to more than 400 million by 2030,” predicted ExxonMobil chairman Raymond on Nov 4, 2004. “Natural gas demand in the Asian region will grow even more quickly, tripling in the next 25 years, in line with power consumption.” Raymond cited an estimate by the IEA that said China would rely on imports for 80% of its oil and about 30% of its natural gas in 2030.

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