Crude markets are in finally for some major adjustments. The OPEC decision to cut output by 1 million barrels per day (bpd) from Jan. 1 effectively signals the demise of the OPEC price band. Dwindling dollar value, it seems has convinced even the doves within the OPEC to shelve the $22-$30 price band. The fall in the OPEC basket prices combined with weaker dollar was too alarming a signal for the crude producers to ignore any further. The dollar in the meantime has softened by almost 30 percent, significantly affecting the real cash that flows into the producers’ kitty.

The impact of the OPEC decision to curtail the output would be evident only in the weeks to come. The already lifted crude is very much in pipeline and may take another few weeks before its starts to show in the global inventory levels. Until, the markets seem to be awash with crude.

The OPEC decision to cut output was apparently hastened by the brutal fact that the OPEC basket fell to under $35 recently for the first time since July. The Cairo decision to curtail output by 1 million barrels per day from Jan. 1 however, represented a middle road.

On one hand the group appeared concerned that the decline in the crude market prices could go a bit longer, while on the other it also wanted to appear behaving responsibly and not giving in to the temptation of having a significantly higher prices in the shorter run. They never wanted to be blamed for pushing crude prices again to the unprecedented levels, the markets touched mid-October.

In the meantime, the markets also appear to be testing the OPEC resolve to cut output. OPEC members are not very well known for respecting their output quotas and hence and are often accused of flouting the output quota levels. Overproduction has been a perennial problem for the OPEC oil producers. This time around, over the past few months however, as the OPEC crude producers were pushed by the market to produce at seams, crossing the official output levels was encouraged. However, this was more of an exception rather than norm. In normal circumstances, OPEC expects its members to fulfill its obligations as members of the organization, so as to ensure “fair returns” for both the producers as well as the consumers. The issue of what is meant by fair returns is though yet to be resolved. The Iranian Oil Minister Bijan Namdar Zangeneh says the new OPEC price target could be $32 a barrel, up from the $25 a barrel, the group was targeting until recently.

Saudi Arabia has already started to enforce the decision, by cutting its production by 500,000 barrels per day (bpd) — five months after these were increased. Minister of Petroleum and Mineral Resources Ali Al-Naimi reaffirmed that the Kingdom would start producing its usual 8.078 million barrels a day, as per its quota. Refiners in Japan and South Korea said last week Saudi Aramco has informed them that supplies would be chopped off by 8 percent in January. Saudi sales to global majors have also been reduced significantly in the meantime.

In its monthly market report, the IEA while maintaining the global oil demand for 2004 at 82.4 million bpd, has however, has cut back its demand growth forecast for the next year by 80,000 bpd. The IEA now says that growth in the crude demand over the next year would now only grow by 1.4 million bpd. The IEA monthly report recorded the slowing down of the Chinese demand by 8.6 percent in third quarter of the year to 6.25 million bpd, after recording exponential growth of 19 and 25 percent in the first and second quarters of the year. Demand growth in China was projected by the IEA to remain at about eight percent during the current quarter. China has been mentioned in the report as, “the main wildcard.”