OPEC Stands Pat as Rig Activity Declines

Well, we have our answer from OPEC, which decided to keep output numbers at current levels, despite plenty of rumors among oil traders that it would cut supply.

At a meeting yesterday, OEPC officials indicated that higher energy prices would further crimp the global economy, so cutting back on oil supply was a no-go. To me, it sounds like OPEC has been on the receiving end of big lobbying efforts from Washington, London, Hong Kong, and other political ports of call.

Of course, what the pols want is to buy some time, and OPEC was only too happy to come across for beleaguered global governments. Yesterday’s decision to hold supplies steady is a temporary one – OPEC reserves the right, 11 weeks from now at its next meeting, to reduce oil output, which I suspect it will ultimately do. OPEC officials are still distracted by December’s mandate to lower quotes by 800,000 barrels per day (the daily output target cut is 4.2 million barrels per day), so the appetite to cut further was diminished for business, in addition to geopolitical reasons.

Industry observers feel this is the right move – for now.  “OPEC has reestablished its credibility with the current cuts, so I think it would have done more harm to announce more cuts and not meet them,” said Jonathan Kornafel, an analyst at Hudson Capital Energy. “As we got closer to the meeting, sentiment on the cut shifted.”

Call me a conspiracy theorist, but it may be no coincidence that the same weekend OPEC officials decide to hold the line on oil production, thus pretty much ensuring lower oil prices, financial leaders from the world’s 20 largest governments were meeting to figure out creative ways to end the horrible global recession. The fact that there might be an orchestrated effort by leading global governments and OPEC to keep energy prices down while the world’s consumers battle hard economic times, is understandable.

It’s just not helping the oil industry all that much. I saw last week that the total amount of active U.S. oil rigs he number of rigs declined by 44 this week to 1,126, due to continuing weak oil and gas demand. According to Baker Hughes out of Houston, 884 U.S. oil rigs are out there drilling for natural gas while 228 rigs were looking for oil. That’s an alarmingly low number. Last year we could count almost 1,800 active oil rigs in the U.S., when oil was trading at $145 per barrel. Today, we’re down to $45 for a barrel of oil.

I don’t know where the bottom is in terms of active oil rigs – we went as low as 488 in 1999 – and we’re way off historic highs of 4,500 active rugs in the early 1980’s, during the boom years. But the industry is clearly hurting, and until the price of oil and gas rises significantly, silent oil rigs will be the order of the day.

Posted 03-16-2009 3:07 PM by Bret Boteler
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