Oil Prices Climb on Speculation That Opec and Russia Will Cut Production

By Jason Simpkins
Associate Editor
Money Morning

Speculation that oil prices are beginning to bottom helped push crude contracts higher yesterday (Wednesday), as traders closed out short positions and rumors surfaced that both Russia and the Organization of Petroleum Exporting Countries (OPEC) are planning to cut production next week.

Light, sweet crude for January delivery rose $1.45, or 3.4% to settle at $43.52 on the New York Mercantile Exchange, after climbing by as much as 7% earlier in the day. Futures have plunged roughly 70% since hitting a record-high $147.27 a barrel in July. However, they may be set for a rebound as traders close out short positions and production cuts offset slackening demand.

Traders who took short positions on crude contracts, or placed bets that prices would fall, are buying contracts to cover those bets now that oil has dropped more than 20% in the past two weeks. Their exit from the market has been expedited by the belief that prices are nearing a bottom, as well as suggestions that both OPEC and Russia will cut production next week.

Russia will air proposals on oil production cuts no later than December 17, Sergei Shmatko, the nation’s energy minister, told Interfax.

“Right now we need to see where we stand with respect to OPEC’s stated position,” Shmatko said. “I know that OPEC is preparing serious plans to cut production.”

Shmatko added that OPEC President and Algerian Oil Minister, Chekib Khelil was keen “to see Russia in OPEC,” but that Russia rather see “non-OPEC suppliers consolidate their position in order to keep the market stable.”

OPEC members are scheduled to meet in Algeria on Dec. 17 to discuss further production cuts. Oil has fallen more than 30% since the cartel last slashed its production quota, a 1.5 million barrel per day (bpd) reduction on Oct. 24. Analysts anticipate the OPEC that the next supply cut could be anywhere between 1.5 million bpd and 2.5 million bpd.

“The expectation of an OPEC cut is going some way toward curbing the downward momentum in prices,” Toby Hassall, an analyst at investment firm Commodity Warrants Australia, told The Associated Press. “A cut of 1.5 million to 2 million barrels a day seems like a reasonable range.”

Demand for oil has plunged over the past six months, with the onset of what is shaping up to be a severe global downturn. In its last monthly oil outlook, issued Nov. 17, OPEC trimmed its 2009 demand forecast by 530,000 to 86.68 million bpd. The Paris-based International Energy Agency is expected announce a cut to its 2009 forecast in its monthly report, set for release tomorrow.

Still, many analysts believe the market has “overshot” the downside to oil, and that further production cuts will be enough to create a floor for prices.

“We’re probably in the early stages of forming a base at the moment, and the price will likely edge up toward $60 or $70 by the middle of next year,” Hassall said. “We probably overshot on the downside the same way we overshot to the upside earlier this year.”

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