Strategic Briefing | 6.14.12 | Falling Oil Prices & The Economy

Economy’s Mixed Blessing: Commodity Prices Fall
The New York Times | June 13
“The world economy is in risk of a recession and on that possibility, commodity prices weaken,” said Allen L. Sinai, chief global economist for Decision Economics, a consulting firm. “Lower inflation comes with weakening economies.”
Oil is among the commodities that have fallen in price the fastest despite continuing tensions in the Middle East and the tightening sanctions on Iran. OPEC production has been soaring in recent months because of mushrooming crude exports from Iraq, an almost total resumption of exports from Libya since the fall of the Qaddafi dictatorship, and a concerted drive by Saudi Arabia to push up production. At a meeting in Vienna on Thursday, OPEC is expected to decide to keep production steady despite weakening prices.

Why Saudi Arabia wants to bathe the world in affordable oil
FT Alphaville | June 13
Oil watcher and economist Phil Verleger has some reasons why Saudi Arabia’s insistence on raising production quotas is a sincere bid to keep prices under control, and would willingly risk prices falling below its own “break even” price. He summarised his reasons this way:

The economy. Saudi Arabia recognizes that lower prices in 1999 were a great helping solving the Asian debt crisis.
Russia: The Saudis are very upset with the situation in Syria. Lower oil prices will convince Putin to cooperate
Iran: Lower oil prices will increase pressure on Iran.
Canada and the US: Lower prices will slow development of shale oil and tar sands.
Conservation: lower price might just slow the move of the US to efficiency. (might)
G20: Saudi Arabia likes to be considered part of the club. Lower prices would help renew their membership.

Oil steady ahead of OPEC meeting, Greek polls
Reuters | June 14
Top oil exporter Saudi Arabia is now under pressure from fellow OPEC producers to cut oil output. Price hawks in OPEC are fretting that slower economic growth will send crude, already off $30 since March, sliding further.
“We think that given the economic situation, above all in Europe, there is a serious threat that prices might fall drastically and so our policy is to defend the production ceiling agreed in December,” said Venezuelan Oil Minister Rafael Ramirez ahead of the OPEC meeting in Vienna.
Oil Trades Near Eight-Month Low Before OPEC Meeting
Bloomberg | June 14
OPEC, which convenes in Vienna today, will probably maintain its output ceiling as concern that global growth is shrinking outweighs calls for supply cuts to stem sliding crude prices, three of the group’s ministers said. Oil advanced after approaching a technical support level, data compiled by Bloomberg showed.
“The market is in a distinctive wait-and-see mode,” Ole Hansen, senior manager of trading advisory at Saxo Bank A/S in Copenhagen, said by phone. After the results of the OPEC meeting the “immediate focus will switch to Greece elections this weekend because that’s really where demand side questions will be answered,” he said.
Short-Term Energy Outlook
U.S. Energy Information Administration | June 12
West Texas Intermediate (WTI) crude oil spot prices averaged more than $100 per barrel over the first 4 months of 2012. The WTI spot price then fell from $106 per barrel on May 1 to $83 per barrel on June 1, reflecting market concerns about world economic and oil demand growth. EIA projects the price of WTI crude oil to average about $95 per barrel over the second half of 2012 and the U.S. refiner acquisition cost of crude (RAC) to average $100 per barrel, both almost $11 per barrel lower than last month’s Outlook.