A slippery, oily slope.

Hey everyone,

I had to refresh my browser....repeatedly...when I saw that OPEC is cutting oil production.

Cutting production by Five hundred thousand barrels a day:

500,000 barrels *42 gallons/ barrel = 21 million gallons of crude per day.

However, despite the temporary price pump, I can understand why they are doing it.

It goes back (a whopping 48 hours) to Fannie and Freddie. If the US currency stabilizes or appreciates - the non-US demand for oil decreases. Oil is traded in dollars (except in Iran) and therefore appreciation in the dollar increases the price of oil to people in countries that don't use the dollar.

Let me explain this further - if you are a Brazillian company and you want to buy oil on the open market you need to take your Brazillian Reals (pronounced ray-ALS) buy US dollars and then buy the oil contract. If the US dollar appreicates, it takes more Reals to buy enough US dollars to buy a full contract. Therefore, you see a higher price and are less likely to buy oil.

Now, the most critical reason why production was cut in an effort to temporarily boost prices or stem the decline is any country that SELLS oil in currencies other than the dollar makes less money when the dollar appreciates.

So, if you are Iran, the only country which doesn't sell oil using the US dollar AND the traditional price hawk, you are going to do everything in your power to keep the price of oil as high as you can. Normally, OPEC votes with Saudi Arabia. This time, Iran, Algeria, and Venezula must have had enough push to override the Kingdom. Algeria has nothing except oil and Venezula's Chavez needs to prove to people that he is willing to fight for higher oil prices which basically keep him viewed positively by the poor - who were the source of his rise to power. Put this all together and you have an output cut on your hands.

Yet...oil seems to be holding around $104 (@ 1 AM EST 9/10/2008) in international trading. But with the dollar still having room to appreciate...OPEC is probably wishing they kept prices at $70 and didn't encourgae every American to dump their SUV.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management