Oil Markets Falling off the Cliff on OECD Concerns

Oil prices declined this week following a report from the Organization for Economic Cooperation and Development that major world economies were expected to make an "uneven recovery" over the coming years. In early November, OPEC said ongoing concerns about the sovereign debt crisis in European economies, coupled with problems with other leading economies, would be a drag on commodity markets. In the United States, meanwhile, partisan rancor over the so-called fiscal cliff means the world economy is nowhere near a post-recession climate.

The OECD, in its latest economic outlook, said it expected to see a "hesitant and uneven" economic recovery develop over the coming years. Growth in the gross domestic product across the 34-member OECD was expected to remain at 1.4 percent for next year before finally passing the 2-percent mark in 2014.

"The world economy is far from being out of the woods," said OECD Secretary-General Angel Gurria in a statement from Paris.

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The OECD growth forecast was in line with OPEC's expectations expressed in its monthly market report for November. OPEC, in its forecast, said recovery was "quite weak" in the OECD, noting economic activity there "does not look totally healthy." While hurricane season and the onset of winter is expected to increase oil demand for the fourth quarter, OPEC, in its report, said OECD oil demand for the year was down 0.76 percent compared to last year.

Oil prices dropped below $87 per barrel Wednesday following the OECD's report. While some recovery is expected in Japan, the crisis in the eurozone is expected to pose "a serious threat to the world economy," the report said.  In the United States, meanwhile, the OECD said that even if the Obama administration can broker a budget deal before the New Year and avoid falling of the "fiscal cliff," growth in world's largest economy is expected at 2 percent next year, down from the 2.6 percent predicted in May.

House Speaker John Boehner, R-Ohio, said Wednesday there was no way the U.S. economy could grow by raising taxes for the wealthiest Americans.

"It'll hurt small businesses," he said. "It'll hurt our economy."

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But Gurria said if U.S. budget negotiations fail, it could push what he said was "an already weak economy" back into recession.

OPEC, for its part, said U.S. financial issues weren't expected to have a major effect on the country's oil demand. For Europe, however, a "tumbling economy" is reflected in less-than-positive figures for oil consumption.

"Failure to solve the euro area crisis could lead to a major financial shock and global downturn" said the OECD's Gurria. "Governments must act decisively, using all the tools at their disposal to turn confidence around and boost growth and jobs, in the United States, in Europe, and elsewhere."

By. Daniel J. Graeber of Oilprice.com