OPEC announces production cut of 520,000 barrels per day

OPEC has agreed to cut crude oil production by 520,000 barrels per day in the next 40 days, OPEC's President and Algerian Energy Minister Chakib Khelil said on Wednesday [10 Sep 2008]. World oil prices rebounded following the announcement. NYMEX light sweet crude oil for Oct 2008 delivery rose to $104.17 in New York while Brent North Sea crude rose to $100.80. Oil had sunk below $100 for the first time in 5 months in London when Brent dropped to $99.04 on Tuesday, while NYMEX hit a low of $101.74. An OPEC spokesman said that OPEC members had agreed to "strictly" comply with a quota target of 28.8 million barrels per day. The OPEC statement identified a shift in sentiment in the oil market linked to falling economic growth, a strengthening dollar, easing geopolitical tensions and greater supply.

- The following factors are converging around this time period, as I've noted over on peakoil.com :

1. OPEC announcing production cut by 520,000 barrels per day.
2. The Beijing Olympics shutdown is scheduled to be lifted next week.
3. USDX is rapidly approaching the 80 resistance level.

OPEC is obviously defending the $100 price level. Before this announcement, it was all just rumour and market talk, and now this is pretty much confirmed. The market was jittery with conflicting "news", some saying that OPEC would keep output steady, and some saying Iran among others had been calling for output cuts. OPEC had been raising production by around 500 kbpd around Jul-Aug as oil prices shot to new records, and all they are doing here is to revert back to the earlier level. Peakoilers have noted that it's likely mostly heavy sour crude anyway, which would just go to show how things at the margin can have a big impact.

As for the second factor, the Beijing Olympics was over on 24 Aug 2008, but the Chinese authorities decided to give the factories and half the Beijing-area car fleet a "mandatory rest" till 20 Sep 2008, in order to continue giving the tourists a "good impression". It's all a matter of "face trumping economy". My hypothesis is that the traders would need to start buying on behalf of China about a week or so before the factories restart and the cars get back to the roads, as the supply chain takes about a week to fill, so the timing could be right around these few days or so. Of course I could be wrong and they could have stockpiled some inventory in which case the timing would be off by however long the inventory lasts, but it is definitely nowhere near the US SPR's capacity of 1 month's worth of demand. My only worry being that the state of the global economy would be so terrible by then that they did *not* need to restart those factories. That would be something.

The last one is more of a technical factor than anything else - the 80 level on the USDX, or US Dollar Index, should be a pretty strong resistance level, having been a support for 22-23 years and then gotten decisively broken on the downside. There are those who say that the recent rapid rise and breakthrough of multiple resistance levels of 72, 74, 76 and 78 was due to manipulation and others who say otherwise. If 80 holds, we could expect a reversal and for the US dollar to do what it does best - which is to say, continue falling. And we would get a good confirmation of 80 as a resistance level. And the best it could do is probably to consolidate between 76 and 80.

Singapore to trial EVS (Electricity Vending System) with 1000 users from Nov 2008

channelnewsasia.com, ema.gov.sg :

To be on trial later this year, the Electricity Vending System (EVS) is the latest stage in a S$3 million project. Since 2003, about 10,000 large industrial users, which account for 75% of electricity demand, have already been able to negotiate their own electricity rates. The Energy Market Authority (EMA) expects electricity suppliers to offer different peak and off-peak packages to suit different consumer lifestyles. 1,000 volunteers from Marine Parade and West Coast will start 6-month trials from Nov 2008 and Feb 2009. If successful, it will be rolled out to all 1.2 million homes and small shops around 2010.

EVS allows users to buy electricity via the Internet, mobile phones, or vending machines at convenience stores; upon payment the amount is instantly credited to the user's electricity monitor wirelessly. The new EVS meter costs more than the current electricity meter, but this is expected to be less than the amount currently spent on billing, opening and closing of accounts and meter reading, which would no longer be necessary. Consumers could save money by being more aware of how much electricity they use. A consumer display unit (CDU) will show real-time electricity usage. As soon as an appliance is switched on, the number on the display unit rises, and users will see instant savings when they turn off the appliance.

- The good thing is that with this EVS system, the Singapore government is going to let market forces drive the pricing of electricity even more so than before. With competition from different suppliers, greater efficiency due to phasing out of the billing and manual meter-reading processes, it's going to be a whole new game for the consumer electricity market.

But the bad thing is also the fact that market forces are going to be driving the electricity pricing. Instead of knowing what the electricity rates will be for the next quarter as is the case now, with the new system, the electricity rates will vary according to market dynamics. Prices will be a lot more volatile, and this has the potential to confuse consumers. Another thing : with this, the system in effect becomes a prepaid system, instead of a postpaid system. It is a dramatic shift in the usage pattern. No money, no electricity. And that's the other thing about market forces - they are tough and unforgiving.