I kind of agree in that there is a reasonable case for $50 oil and that was reflected when I stated that I fundamentally agree with the first rally that took us to $46. On the other hand, I disagree with analyst suggestions that oil will fly back to near $100 levels. The dollar remains a mystery. On friday, it technically defended its lows and went up.

As for production cuts, its hard to see sustainability on that front! Managing supply can have effects in the short-run, but the long-run is more determined by demand. Also, OPEC is a cartel and cartels never work perfectly because of the presence of a prisoner’s dilemma situation. Most OPEC members are involved in projects that will increase their oil productions levels overtime. Moreover, Non-OPEC countries such as Brazil are relentlessly searching for more oil and finding it. The only advantage for most OPEC countries (think GCC) is the relatively low production costs. With more cost-efficient equipment, Non-OPEC members such as Brazil can have easily make up any cuts in OPEC production. On the other end of the spectrum, oil usage is becoming more efficient (think green cars).

Another significant issue is the effects the contango could have on oil prices. As you may know, spot oil prices were extremely cheaper than future prices for the past 3-4 months. This contango created a prolific trade: Buy spot oil, store it, and sell it in the future. Many got involved in this trade. Many bought oil at an average of $40 levels while futures traded at $70, filled up their storages, and even rented ships to store it (remember that ship rental was down the drain in the past 3-4 months). As shipping rates increase (they are increasing dramatically), many will close this trade and this could result in a supply shock.

We happen to be very bearish oil, but who knows where price is headed. The Dollar Index outlook is still leaning towards bearish…

Apparently, production cuts are actually trumping the fall in demand. Maybe there is a real case for an average price of 50 USD a bbl