U.S. Oil Stockpiles Continue to Build, Undermining OPEC’s Cuts

(Wall Street Journal – David Bird)

The Organization of Petroleum Exporting Countries cut crude-oil output by nearly 1.3 million barrels a day in January in an attempt to tame the supply glut that is anchoring prices near $40 a barrel.

But as the cartel tightened the taps, crude-oil inventories in the U.S. were increasing by 700,000 to 900,000 barrels a day. That growth rate, the most seen in the month of January in 85 years and the highest in any month since at least October 2002, is a setback to OPEC’s efforts.

Crude oil is piling up as the global economic crisis has cut consumer demand for petroleum products such as gasoline and diesel fuel. The oversupply that is driving down near-term prices makes it profitable for refiners to amass crude-oil inventories.

Rising inventories are a further blow to OPEC, which is reeling from the fall in global oil demand and prices. Crude-oil futures are down 72% from their record above $145 a barrel hit in July. Each barrel of oil that goes into storage in consumer countries weakens the cartel’s hold on the market and potentially prolongs the price skid.

OPEC pledged to cut output by 4.2 million barrels a day in September. Since then, the group has cut production by a total 3.135 million barrels a day, indicating a compliance rate of 75%, a survey by Dow Jones Newswires estimates.

Saudi Arabia, the world’s biggest oil exporter and OPEC member, cut output below its agreed level of 8.05 million barrels a day in January. Saudi output of 7.9 million barrels a day was the lowest since October 2002. Now, analysts said, the plunge, alongside oil’s inability to recover, will require deeper cuts by Saudi Arabia and OPEC to prop up the market. Read more here.

OPEC Plans Drastic Cut in Oil Production

(Washington Post – Steven Mufson)

Facing its biggest test in a decade, the Organization of the Petroleum Exporting Countries is planning to make a major cut in oil output at a meeting in Oran, Algeria, tomorrow in an effort to stop the slide in oil prices, which have dropped by two-thirds since July.

Confronted by sputtering world oil demand, the cartel is expected to make production cuts of about 2 million barrels a day to reduce the size of world inventories and to boost prices back up to the $75-a-barrel level that Saudi King Abdullah has called reasonable. It will be the group's fourth meeting in four months as it tries to adjust to the weakening world economy.

“They are going to cut and they are going to cut big,” said Roger Diwan, a partner at PFC Energy, a Washington consulting firm. Even after substantial OPEC output cuts earlier in the fall, world oil inventories “are building much faster than people thought,” Diwan added. Oil stocks are big enough to cover 57 days of supplies, up from the five-year average of 52 days.

Reaching the $75-a-barrel price target could be a tough task, however. U.S. oil demand has been weaker than any time since the economic slowdown that followed the Sept. 11, 2001, attacks on the World Trade Center and Pentagon. Even though retail gasoline prices have plunged to a nationwide average of $1.66 a gallon for regular, cash-strapped motorists continue to use less fuel than they did a year ago. The Energy Information Administration is forecasting a 3.4% drop in motor fuel use for 2008, and a bigger drop in oil-based motor fuel after taking rising ethanol use into account. Click here for the complete article.