Last week, the major crude oil producing nations, ex the US, agreed to cut a total of two million barrels from their aggregate daily production. This reduces total world production by about 2%. That’s twice as much as the consensus had expected.

This is actually a more significant decrease than it might seem. Oil demand is relatively inflexible–meaning that what are minor changes in supply can cause large changes in prices.

What strikes me as most odd about the current situation is also something that I don’t see being discussed in the financial press–the fact that crude oil prices aren’t following their usual seasonal pattern.

Prices are typically their weakest from the end of January through, say, April, when the deliveries for the (northern hemisphere) winter are over and the summer driving season hasn’t yet begun. The summer is the strongest part of the year, driven by auto usage in the US. After Labor Day, demand slips for a short time, before recovering in October, as providers of heating fuel begin to build inventories.

This year, though, the crude oil price has been falling steadily since June, admittedly from a Russian invasion-induced peak. No sign of an early October pickup, however. And the oil price recently cracked $6 or so below the $85 a barrel level that Saudi Arabia needs to balance its budget.

Where is the demand shortfall coming from? My guess is China, where oil imports appear to be down yoy by a million daily barrels. How much is due to the 2008-US style property collapse now underway there or the covid-motivated industrial shutdowns, I have no idea.

My reading of the recent OPEC meeting is that it was much less an expression of solidarity with Russia than of the belief that Chinese economic weakness is not going to go away any time soon. Arguably, if OPEC’s goal were to strengthen the pro-OPEC, pro-Russia Trump wing of the Republican party, the price increase would have been immediate.

From a longer-term perspective, it seems to me, OPEC derives its political power in large part from US policy. We represent 4% of the world’s population but consume 20% of the world’s petroleum. Bringing ourselves into line with usage in other industrial nations would cut our consumption in half and leave OPEC in tatters. What is stopping us? …a highly-protected, inept domestic auto industry and a powerful fossil fuels lobby.