OPEC’s failure to act at its November 29th meeting, coupled with a steady stream of bad economic news, sent oil steadily downwards from an opening price of $55 a barrel last Monday to a Friday close of $40.81. It was the biggest one week drop in oil prices since 1991. Bets that oil for January delivery will fall below $20 a barrel were actively traded in New York on Friday. Merrill-Lynch foresees $25 oil a possibility in coming months.

The IEA once again cut its demand forecast for 2009 by 170,000 b/d to 86.37 million b/d. The best estimate is that so far OPEC has cut about 1 million b/d of the 1.5 million b/d cut that was adopted in October, although more cuts are expected. Kuwait and Qatar will reduce crude shipments in January and Saudi Aramco raised selling prices for shipment to Asia, a sign that further supply reductions are coming.

Oil prices are now so low that many of the “stripper” wells that operate in the US are no longer profitable and face shutdown. These wells account for 18 percent of onshore US production and produce about 1.3 million b/d.

This winter is starting to look like the coldest in years for the northern US. Retail heating oil is now 60 cents a gallon cheaper than at this time last year and stockpiles are below normal, suggesting that shortages could develop in the distillate market this winter

Over the weekend, OPEC’s president Khelil warned that oil markets should brace for a surprise decision on output cuts when the cartel meets in Oran on December 17th. Khelil said that “a consensus has formed for a significant reduction of production levels” and that it could be “severe.” Most analysts had been predicting a 1 million b/d output cut, but Khelil noted that some were now talking of cuts of as much as 2 million b/d.

The two previous OPEC cuts, while not yet fully implemented, have done nothing to halt the price decline. Khelil suggested that only the announcement of a spectacularly large production cut will be sufficient to shock the markets into a rebound. As usual the issue of whether next week’s announcement will turn into actual cuts remains open. It appears likely that Russia will announce some sort of production cut in conjunction with the OPEC meeting.