OIL falls despite HUGE OPEC cut

The continuous fall of oil prices surely has started worrying the oil-producing countries. During mid 2008, Oil reached a high price of $147 per barrel. Those were the times, when people, including chief of Gazprom, had started talking about oil prices above the $200 mark. Who would have thought that just within months, economic activity in US and the whole world would deteriorate to such an extent that oil would shed over 60% of its price ! Anyway, now that oil prices are falling, we have '$30 forecasts' from Goldman Sachs, yes, the same Goldman Sachs who also had '$200 type forecasts' just a couple of months ago.
OPEC has decided to cut oil output by 2.2 million barrels per day. This is roughly 3.3% of global daily oil consumption. Now that the oil prices have fallen so low, these countries have started talking about 'fair price for oil'. Cutting output in order to push oil prices towards $80 or perhaps even $100 mark seemed to be the intention. Note that this is the largest cut in oil output. However, oil prices have fallen by over 4.5% despite this news.

Oil prices are directly related to Oil demand and Oil demand is directly related to 'economic activity'.

This further fall in oil prices is both bad news and good news at the same time. Good news, because it will boost businesses, consumer sentiment, soften the blow of recession, reduce air ticket prices, etc. etc. Bad news, because the very fact of fall in oil prices despite record cut in oil output points towards rapidly deteriorating economic conditions.

Dec 18, 2008

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