Oil at four-year lows near $40 despite OPEC cut

Saudi Arabia, OPEC's de-facto leader, said today the group will slash a record 2 million barrels from its daily production as of January 1, while Russia and other countries said they would remove hundreds of thousands of additional barrels from the market.

An official decision to cut 2 million barrels from output all at once would be a first for the organization. OPEC had cut that amount from its output four years ago, but that was done in two stages.

Also significant would be formal support from Russia, Azerbaijan and other non-OPEC producers. Mexico, Norway and Russia slashed production in the late 1990s, at a time oil was selling for about $10 a barrel. (via OPEC to cut oil output by 2 mn barrels a day).

These price cuts may be difficult to sustain for a simple reason that Oil revenues are a significant part of Government revenues in these countries. While oil revenues are on a down ward drift - Government expenses are trending upwards. Combine this the recessionary global outlook, and pump priming will increase Government's expense bills.

The US-OPEC nexus of increasing oil prices leading to greater dollar liquidity onto higher lending resulting in global overcapacity boosting asset prices in booming stock markets is now broken.

To recreate that cycle will take a decade - at least, if at all.