Crude oil prices have fallen about 15% in the past two months, but that does not mean OPEC should cut its current production quota. So says major oils analyst Michael Mayer with Prudential Securities Inc. In a recent report, Mayer noted that OPEC ministers held a special meeting in August to decide on a production cut that would take effect this month. But based on his supply/demand model, Mayer has concluded a quota cut is not in OPEC's best interests and would do little to make a difference. The cartel already is overproducing, by about 800,000 barrels per day. Compliance with this year's production cuts is thus running around 70%, a dismal record when compared with the near total compliance that OPEC achieved last year. "I think they would be better served by delivering full compliance with the current quota. This would have about the same volumetric impact on actual production as a cut of 1- to 1.5 million barrels a day would [and would be positive in terms of their credibility]." The early-August quota was about 24.2 million barrels per day, excluding any output from Iraq, but recent production was closer to 25 million per day. Mayer thinks seasonal oil demand will kick in by the third quarter, rising by 2 million barrels per day, followed by another 1 million barrels a day in the fourth quarter. This will absorb the 2 million barrels a day that Iraq has started to produce. Lastly, and here's the good news: Mayer thinks that the valuations of oil prices, gas prices and refining margins in the U.S. are each within just 10% of their likely low points for this year.
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