Friday, November 21, 2008

"If one player cheats, the rest follow and the effort collapses, as it did in the early 1990s."

I'm not a fan of OPEC or Cartels, and I don't usually encourage cheating, so I like this story in the FT:

"
Opec disarray as oil sinks to $50

By Carola Hoyos and Javier Blas in London

Published: November 21 2008 02:00 | Last updated: November 21 2008 02:00

The oil price yesterday sank below $50 a barrel for the first time since 2005 as the first signs of fractures within the Opec oil cartel became apparent.

Nigeria said it did not want to cut its production to try to stop the slide in prices because it needed high output to balance its budget, while Iran, Kuwait and others said they would support another production cut.

Odein Ajumogobia, Nigeria's energy minister, said it was not in his country's interest to cut production further, raising the likelihood the cartel could fail to achieve its goal of boosting prices by cutting output.

"We are in the process of [processing] our budget . . . based on an [oil] benchmark of $45 . . . If you cut the volume then it is going to affect your budget, so obviously we are not advocating a cut because it is not in our interest," he said.

Opec risks collapse if it is unable to act cohesively. The power of a cartel to boost prices depends on all significant members forgoing the revenue gain from selling more oil for the gain from the price boost that comes from withholding oil from the market. If one player cheats, the rest follow and the effort collapses, as it did in the early 1990s."

I want it to collapse.

"The drop came as investors dumped oil and other commodities on heightened fears of a protracted global recession and after Goldman Sachs, Wall Street's largest oil trader, told its clients it was closing all its trading recommendations in energy."

Wow. All energy?

"The options market priced in a growing likelihood that oil prices could sink as low $40-$45 a barrel before the end of the year, with the cost of insuring against such an event jumping overnight by as much as 90 per cent."

There's insurance on this, but on bonds it's not possible?

"The slowdown is curbing demand for raw materials from oil to copper on a scale not seen in decades. Antoine Halff, of brokerage Newedge in New York, said: "Demand destruction today rivals that caused by the oil shocks of the 1970s."

Interesting side effect.

"All Opec members are struggling with the sharp drop in oil prices from this summer's record of $147. Ecuador, Opec's newest member, this week raised the spectre of defaulting on its loans.

Only the United Arab Emirates, Algeria and Qatar can balance their external accounts in 2009 with prices below $50 a barrel, according to research by PFC Energy, the US-based industry consultant. Saudi Arabia needs barely more than $50, PFC said."

Well, that's not good news, but I still want it out.

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