Over The Barrel

Introduction

Despite the pundits prognostications that OPEC would leave their production unchanged as we lead up to the meeting on September 11, 2007, the Saudis once again were seen as coming to the last minute rescue of the OECD powers. Exercising their production heft, they have exhibited a sensitivity for maintaining the status quo in the interest of the global economy. Rather than succumbing to the demands of other radical voices within OPEC such as Iran and Venezuela, the Saudis continue to ally themselves closely with the Western powers. With large arms deals in the offering while meeting with stiff opposition, the Saudis felt there was little choice but to support the major powers by providing an economic boost and avoiding an economic calamity by showing a willingness to use their oil power in a constructive fashion.

Obviously, the Saudis made the decision in their own self interest. Some considerations included:

• - Fears that higher prices would adversely impact the U.S. economy that is already straining from the credit crisis.
• - Prospect that high prices would lead to faster substitution of renewable energy sources.
• - Controlling the power of radical OPEC states. These states who already are producing at capacity would have maintained their market share if the quota was maintained rather than losing market share to other producers.

Most important, the Saudis have given tacit recognition that a global shortage of oil is approaching. The meeting was in many respects telling, and now the question arises as to whether it will be enough.

The OPEC Agreement and What It Means

The resulting agreement by OPEC was in line with our forecast made in mid-July for OPEC production, including Angola and Iraq, increasing to 31 mb/d (see below). This incorporates the fact that OPEC was already exceeding their target by 1 mb/d and that they would target an additional 500 tb/d in production. The December forecast reflects the new production levels.

 With many producers (except Saudi Arabia) approaching sustainable production capacity, output outside of OPEC will gain greater importance. The next Over the Barrel will address the issues with non-OPEC producers. These producers will be a determining force in the longer range outlook for prices and whether gaps in OPEC output and the supply deficit can be covered.

The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company. Copyright © ADM Investor Services, Inc.

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If you would like more information on Over the Barrel, please contact Steve at 1.877.377.7931 or stephen.platt@archerfinancials.com.

The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company. Copyright © ADM Investor Services, Inc.