“Oil prices have witnessed a dramatic collapse – unprecedented in speed and magnitude,” OPEC said, adding that prices have fallen to levels that could jeopardize “many existing oil projects and lead to the cancellation or delay of others, possibly resulting in a medium-term supply shortage.”

The 1.5 million-barrel daily reduction exceeded the expectation of many analysts, but failed to rally crude prices which have plummeted 57% since hitting a record high record high of $147.27 a barrel on July 11.  Light, sweet crude for November delivery fell $3.09, or 4.55%, to settle at $64.75 a barrel on the New York Mercantile Exchange Friday.

“The financial crisis is already having a noticeable impact on the world economy, dampening the demand for energy, in general, and oil in particular,” the cartel said. “This slowdown in oil demand is serving to exacerbate the situation in a market which has been over-supplied with crude for some time.”

On Oct. 10, the International Energy Agency (IEA) lowered its forecast for 2008 global demand growth by 250,000 barrels per day (bpd) to 440,000. The agency cut its 2009 growth forecast by 190,000 bpd to 690,000.

In its October report, OPEC reduced its forecast for 2009 demand by 190,000 barrels a day, as well. It was the cartel’s seventh-consecutive forecast reduction. OPEC said that total oil consumption in developed countries fell by more than 1 million barrels per day in the 12 months through to the end of September.

Developed nations in 2009 will need only 400,000 barrels a day more oil than this year, the cartel said, whereas demand from emerging markets will increase by an estimated 1.1 million barrels.

The cut announced Friday, effective Nov. 1, was at the high end of analysts’ expectations, but as prices continue to slide, there is now a growing sense that the reduction won’t be enough.

Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut, told Bloomberg News that a further reduction of 500,000 barrels a day is possible.

“If prices continue to fall, they may find themselves having to revisit deeper production cuts,” Armstrong said.

OPEC President and Algerian Oil Minister Chekib Khelil said at a news conference that the cuts could reach 1.8 million barrels per day by the end of the year, which would mean an additional cut of 300,000 barrels a day, perhaps at the group’s next meeting in December. He denied that there would be any impact on inflation, or growth, if such a cut were necessary, and that the cartel would be willing to increase production should prices rebound.

With control over 40% of the world’s oil supply OPEC is the arbiter of oil prices. As such, the group walks a very fine line. If the cartel pulls the reins too hard on production, it risks a price spike that would cause demand to drop even further.

“They have to be careful of cutting production in a tough [global] economy,” Phil Flynn, analyst at Alaron Trading told The Associated Press. “They could make [falling oil demand] even worse.”

However, if OPEC overproduces, the price of oil could collapse, just is it did 11 years ago. In 1998, the price of crude skidded 28% over a 10-month period, below $10 a barrel, after OPEC raised quotas in the face of the Asian financial contagion. Oil prices that low make it unprofitable for corporations to begin new projects or seek out new oil sources.

A lack of exploration and development would make the world vulnerable to an energy shock when the global economy regains traction and demand picks back up. In fact, many analysts believe that even at current prices enough projects will be delayed, and enough investment curtailed, to spur a serious rebound in oil prices within the next few years.

Barclays Capital, for one, said the world faces “a serious supply-side crunch” within a few years when world demand comes back online.

“The dominant market view remains that sub-$70 short run prices are a stop on what might be a circuitous route back above $90, not a wind-swept motel on the route to even lower prices,” Barclays said.

Source: OPEC Cuts Output by 1.5 Million Bpd as Oil Prices Slump

• Microsoft Corp.’s (MSFT) quarterly profit rose 2% from a year ago, the company said yesterday (Thursday) in a statement. The world’s largest software maker earned $4.37 billion, or 48 cents per share, in the quarter ended Sept. 30. Sales rose 9% to $15.1 billion.

• Goldman Sachs Group Inc. (GS) is cutting 3,200 jobs, or 10% of its work force, as the firm struggles with the credit crisis and transitions into a holding company. The cuts add to more than 130,000 jobs eliminated in the financial industry since mid-2007, topping the 83,000 lost after the Internet bubble burst in 2001, Bloomberg reported.

• The Dow Chemical Co. (DOW) yesterday (Thursday) reported a 6% rise in third-quarter profit. The company reported earnings of $428 million, or 46 cents per share, up from $403 million, or 42 cents per share, a year ago. Sales rose 13% to $15.4 billion.

• Sony Corp. (ADR: SNE), the Japanese consumer electronics giant, announced (Thursday) that profits would be markedly weaker for fiscal year 2008. Sony predicted earnings of $1.5 billion (150 billion yen), down from an earlier July forecast of $2.4 billion (240 billion yen), The Washington Post reported.

• An auction to set the value of Washington Mutual Inc. (OTC: WAMUQ) debt was held yesterday (Thursday). Markit and Creditex, auction administrators, set the debt cost of failed bank Washington Mutual at 57 cents on the dollar. Sellers of credit default swap protection must pay 43 cents to counterparties, MarketWatch reported.

• Crude oil gained $1.09, or 1.6%, to settle at $67.84 yesterday (Thursday) in anticipation of the Organization of Petroleum Exporting Countries (OPEC) meeting today (Friday). “If OPEC makes a cut of 1 to 2 million barrels tomorrow, prices should firm up and move higher in the short term,” Gene McGillian, an analyst at Tradition Energy in Stamford, Conn., told Bloomberg News. “Unless there is something huge announced, the market will eventually start moving lower again because of the weak economy.”

Source: Global Investing Roundups Friday, October 24th, 2008

Many of you were not even born the last time the world discovered a huge elephant oil field. Think about all the elephant fields in the world that you know about. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is a member of OPEC. OPEC stands for the Organization of Petroleum Exporting Countries. Indonesia is going to get thrown out because they no longer export oil, they are now net importers of oil. Malaysia has been one of the great exporting countries in the world for decades. Within the decade, Malaysia is going to be importing oil. 10 years ago, China was one of the major exporters of oil, now they are the 2nd largest importer of oil in the world. Oil fields deplete, mines depletes. This is the way the world’s been working for a few thousand years and it will always work this way. So supply has been going down for 25 years.

Meanwhile, you know what’s happening to demand. Asia’s been booming. There are three billion people in Asia. America’s growing. Most of the world has been growing for the last 25 years. So supply has gone down and demand has gone up for 25 years. That’s called a bull market.

One of the things you’ll find if you go back and do your research is that whenever stocks have done well, such as the 1980s and 90s, commodities have done badly. But conversely, you find that whenever commodities have done well, such as the 1970s, stocks have done poorly. I have a theory as to why this always works, but it doesn’t matter about my theory. The fact is that it always works this way and it’s working this way now.

So before I set off to my second trip around the world, I came to the conclusion that the bear market in commodities was coming to and end. So I started a commodities index fund. [Editor's note: An ETN based on the Rogers International Commodity Index trades on the AMEX under the symbol: RJI.] This is an index fund. I do not manage it. It’s a basket of commodities we put in the corner. If it goes up we make money; if it goes down we lose money. But since Aug 1st 1998, when the fund started, it is up 471%.

I [mention this index] to show you that the commodity bull market is not something that will happen someday. It’s in process right now, and it’s going to go on for years to come, because supply and demand are out of balance. And by the time we get to the end of the bull market, commodities will go through the roof. There will be setbacks along the way. I don’t know when or why, but I know they are coming, cause markets always work that way. Commodities have done 15 times better than stocks in this decade and they’re going to continue that [trend].

You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She’s very happy owning commodities. She doesn’t care about stocks and bonds, but she knows about gold. I assure you, she knows about gold.

Some of you probably diversify, or believe in diversification. I do not diversify; I am not a fan of diversification. This is something that stockbrokers came up with to protect themselves. But you’re not ever going to get rich diversifying. I assure you. But if you DO diversify, commodities are the best anchor because they are not going to do what the rest of your assets are going to do.

I will give you one brief case study about oil, because it’s one of the most important commodities. Some of you know that oil in Saudi Arabia is owned by a company called ARAMCO. It was nationalized in the 70s. They threw out BP and Shell and Exxon. But the last Western company to leave did an audit [of Saudi oil reserves] and came to the conclusion that Saudi Arabia had 245 billion barrels of oil. Then in 1980, after 10 years, Saudi Arabia suddenly announced that it had 260 billion barrels of oil. Every year since 1988 – 20 years in a row – Saudi Arabia has announced, “We have 260 billion barrels of oil.”

It is the damndest thing. 20 years; it never goes up; it never goes down, and they have produced 67 billion barrel of oil in this period of time. When nuts like me go to Saudi, we ask, “How can this be? How can it be that they always have 260 billion barrel of oil?” (By the way, last year they said they have 261 billion barrel of oil). And the Saudis say, “You either believe us or you don’t,” and that’s the end of the conversation.

I have never been to the Saudi oil fields, and even if I had, I wouldn’t know what I was looking at. But I do know something is wrong. I know that every oil country in the world has a reserve problem, except Saudi Arabia of course. I know that every oil company in the world has declining reserves. So I know that unless someone discovers a lot of oil quickly, the surprise to most people is going to be how high the price of oil stays and how high it goes eventually. That is the supply side. Let’s look at the demand side.

The Indians use 120th as much oil as their neighbors in Japan and Korea use. The Chinese use 1/10th as much per capita. There’s 2.3 billion people in India and China alone. Well, the Indians are going to get more electricity. The Indians are going to get motor scooters. They are going to start using more energy, so are the Chinese. But if the Indians just doubled the amount of oil used per capita, they would still use only 1/10th of what the Koreans use. If the Chinese doubled their oil use, they would still be using only 1/5th what the Japanese and the Koreans are using. So you can see what kind of pressures there are on the demand side for oil and energy, at a time of terrible stress on the supply side. These are simple things.

So I would urge you are to take a lesson from my little girls. My little girls are learning Chinese. My little girls are getting out of the US dollar. My little girls own a lot of commodities. I would urge you to do the same.

Indonesia no longer has the ”E” to stay in OPEC (Organization of Petroleum Exporting Countries). It had been a net importer of oil since 2004.

Casey Research’s Energy Division attended the recent oil and gas show in Jakarta, and it’s plain to see where the new oil demand is coming from. Greater Jakarta, Indonesia’s capital, hosts 23 million people, and while ten years ago the majority of them rode bicycles, now nearly everyone has a new 2-stroke Honda motorbike. Those who were riding motorbikes are now driving cars. (And those who were driving cars have moved to Australia to escape the smog.) In this light, it’s not surprising that Indonesia’s oil consumption has more than doubled since 1990.

As to their slumping oil production, it is no doubt partially due to a lack of reinvestment. Foreign oil companies are tired of paying 85% of their revenue into government coffers, and are looking to areas of the world where the fiscal regime is not as severe.

The main problem, however, is an extremely common one. Indonesia has exploited its fattest hydrocarbon targets, and the remaining exploration sites cannot make up for the decline from its existing oil fields. There’s certainly plenty of oil left to be found in Indonesia’s archipelago, but it’s equally certain that they’ll never regain their peak production rates of 1.6 million barrels per day.

Source: Indonesia Says ‘Goodbye OPEC, Hello Peak Oil’

That decision may not seem very significant, but consider it this way: If you were Indonesia, which countries would you rather have as your buddies? A bunch of sleazy, corrupt, idle “lottery winners” such as Nigeria, Venezuela and Angola? Or would you prefer a set of hard-working and diligent neighbors such as Singapore, Malaysia and Thailand? Not to mention two of the largest growth economies in the world: India and China?

Believe me, when Indonesia left OPEC it wasn’t to save the paltry $3 million annual dues. Like Groucho Marx, Indonesia decided it didn’t want to be a member of a club that had such low standards for membership. Instead, it would rather join the good guys.

For emerging market investors, that choice is a significant one.

To be fair, Indonesia’s decision wasn’t just based on a snobbish desire to mingle with a classier set of countries. For one thing, while Indonesia still produces and even exports quite a lot of oil, it’s a big country and is no longer self-sufficient from a petroleum standpoint: While its needs are about 1.1 million barrels per day, its production is now only 860,000.

What’s more, Indonesia doesn’t share OPEC’s ambition, which currently appears to be to squeeze the rest of the world until oil costs $1 million a drop. Indonesia subsidizes oil for its domestic consumers (237 million of them, most of who are pretty poor) and so the last thing it wanted was yet higher oil prices – the subsidies were killing its budget.

President Susilo Bambang Yudhoyono took a huge amount of heat when he increased domestic oil prices by 125% in 2005; there were more riots after he found it necessary to raise them another 30%. However, if he hadn’t done so, oil subsidies alone would have been more than 20% of government spending – and that’s before taking into account food subsidies for the poor, also necessary in a year when rice prices have trebled.

The bottom line is that Indonesia wants lower – not higher – oil prices. More so, in the last decade, it has abandoned the sillier features of an OPEC-member country’s economic-management playbook. While the oil company Perusahaan Pertambangan Minyak Dan Gas Bumi Negara – commonly referred to as Pertamina – is still state-owned, it is allowed to do joint ventures with foreign companies. And, unlike Russia or most OPEC countries, Indonesia’s government has the sense not to steal the proceeds of those joint ventures that prove themselves successful. As a result, more than half of Indonesia’s oil-import deficit will disappear when the Cepu Block offshore oil fields, jointly developed by Pertamina and Exxon Mobil Corp. (XOM), opens up to full production in 2010.

Since Indonesia doesn’t agree with OPEC’s prime objective, and doesn’t approve of OPEC’s typical state-owned kleptocracy as a way of conducting business, it’s not surprising it decided to leave.

That’s not to say that Indonesia has reached free-market perfection. For one thing, it remains astonishingly corrupt – ranked 143rd on Transparency International’s 2007 Corruption Perceptions Index. That places the country far below China and India and close to the level that makes Nigeria and Myanmar such charming places in which to do business. The corruption dates back to the 32-year rule (1966 to 1998) of Indonesian strongman Suharto, who modernized the economy but used his position to grab billions of dollars for himself and his family and was forced out of office in an economic collapse. He died early this year.

Nevertheless, in the last decade, instead of wasting energies on rooting out every vestige of Suhartoism, Indonesia has moved a long way towards being a functioning democracy. Under Yudhoyono, the economy has grown at around 5% per capita, while privatizations have taken place – the steel company Krakatau is due to be privatized later this year, for example. Public spending has been kept under control and, most importantly, Indonesia has used these years of easy money and high commodity prices to pay down debt. Its international debt is now only 35% of its gross domestic product (GDP), a level it should easily be able to live with without major crises.

In summary, Indonesia has moved from a commodity exporter to a true emerging market, and deserves the attention of investors accordingly.

There are only two Indonesian companies with full American Depositary Receipt (ADR) listings, both of them in the telecom sector. Thus, the easiest way for a U.S. individual investor to invest in Indonesia is through the closed-end Indonesia Fund (IF) The fund is run by Credit Suisse Group AG (ADR: CS), is rather small at only $93 million in assets, but has the advantage of selling at a 9% discount to net asset value (NAV), with an expense ratio of 1.55%. It has returned 38% per annum over the last five years, as Indonesia has demonstrated its recovery from the 1998 “Asian contagion” financial crisis, but there would appear to be more to go for.

Indonesia’s satellite telephone company PT Indosat Tbk (ADR: IIT) operates cell-phone and long-distance services, and is currently trading at a Price/Earnings ratio of 15 on trailing earnings. It has a dividend yield of 4%.

Indonesia’s fixed-line telephone company, PT Telekomunikasi Indonesia (ADR: TLK), is trading at a trailing P/E of 14, and features a dividend yield of 3.6%. It offers fixed-line and cell-phone services, and is the country’s traditional telephone provider, founded in 1884.

With the two ratings so close, I would tend to go for the satellite service PT Indosat Tbk, since Indonesia is a large and enormously complex archipelago, with shaky infrastructure.

Source: Even Groucho Marx Would be Happy With Indonesia’s Profit Opportunities

However, many analysts are skeptical that such an initiative will ever gain traction.

“Though we are the food center of the world, we have had little influence on the price,” Thailand government spokesman Vichienchot Sukchokrat said last week. “With the oil price rising so much, we import expensive oil but sell rice very cheaply, and that’s unfair to us and hurts our trade balance.”

Thailand is the world’s leading rice supplier, having exported an estimated 9.5 million metric tons of rice in 2007. With countries like Vietnam, India and Indonesia curbing exports to shore up domestic supplies, Thailand could be responsible for even more of the world’s rice intake.

Rice export volume from Thailand rose 36% in the first four months of the year, the Bangkok Post reported. According to the country’s Foreign Trade Department, Thailand may supply 45% of the world’s rice exports this year.

With rice prices soaring, Thailand has taken the lead in rallying support for a cartel that would include: Laos, Myanmar, Cambodia, and Vietnam. Combined, these five nations account for 14% of world output.

Laos Foreign Ministry spokesman Yong Chanthalansy said Friday that his country would “seriously consider” the idea. Thai officials have also confirmed that discussions were held with Myanmar last Wednesday and Cambodia has voiced support for such action in the past.

“By forming an association, we can help prevent a price war and exchange information about food security,” Khieu Kanharith, Cambodia’s chief government spokesman, told the Associated Press.

However, many experts are skeptical such an organization will ever form because of the tremendous amount of coordination and effort that would have to be involved. While the nations involved would be able to discuss a pricing scale and share information and technology, rice supplies cannot be as easily manipulated as oil production.

“It’s impossible. We can’t fix prices as OPEC does because we can’t control our production like OPEC,” Chookiat Ophaswongse, President of the Thai Rice Exporters Association, told Reuters. “It might be easy for Communist Laos or Vietnam to control their farmers, but we can’t do that in a free-market economy like Thailand. Farmers will rush to grow more rice when prices go up and shift to other crops when prices fall.”

The would-be group includes two democracies, two Communist states and a military dictatorship.

The idea of a cartel was previously discussed in 2001, when Thai exports were struggling to compete with markedly less expensive rice from India, Pakistan and Vietnam. The proposal fizzled then as it seems destined to now.

Nonetheless, agricultural ministers will further probe the possibility in September at a meeting of the 10-nation ASEAN regional group.