Will an OPEC Production Cut Carve a Bottom in Oil?

October 21, 2008

Since July, oil prices haven fallen approximately 50 percent. For many people, the drop in oil is a welcome relief but for oil producers, the price of crude has reached levels that could turn budget surpluses into deficits.

According to a report released by the IMF yesterday on the Economic Outlook for the Middle East and Central Asia, the following are the break even levels on spending for oil exporting countries. If oil is less these price levels, the respective country’s income could fall short of its spending.

Iran = $90
Bahrain = $75
Oman = $77
Iraq = $111

Given that the current price of oil is well below most of these levels, a production cut by OPEC is very likely. The Wall Street Journal has a fantastic graphic today that outlines the changes to OPEC’s quota and the rolling 6 month change in the price of oil.

As you can see, whenever there is a large drop in oil prices in excess of 20 percent, OPEC sweeps in to cut production, triggering a bottom in oil prices shortly thereafter.

Source: Wall Street Journal

For the currency market, a bottom in oil prices could mean relief for the EUR/USD and the Canadian dollar.

Posted in ECB, Forex News, Japanese Yen, Oil, US Dollar, US Economy, oil dollar