Business | Oil & Gas
Oil markets still cool to Opec cut
Oil markets remained unimpressed with the latest production cut announced by the Organisation of Petroleum Exporting Countries (Opec) as the price of US benchmark crude yesterday dipped to a four-year low.
- By Shakir Husain, Staff Reporter
- Published: 23:45 December 18, 2008
Dubai: Oil markets remained unimpressed with the latest production cut announced by the Organisation of Petroleum Exporting Countries (Opec) as the price of US benchmark crude yesterday dipped to a four-year low.
With fears of a global recession spreading, Opec appears helpless to shore up the price of its precious commodity amid dwindling demand for oil.
US benchmark crude dropped to about $38 a barrel for the January futures contract yesterday, about $109 lower since its July record.
Dalton Garis, associate professor of economics and petroleum market behaviour at the Petroleum Institute in Abu Dhabi, said traders had already priced in the 2.2 million barrel per day Opec production cut announced on Wednesday and effective from January 1.
"It did not come as a surprise to the market," he said.
Kate Dourian, Middle East editor of energy information provider Platts, said "we have to wait and see" how Opec members adhere to their respective agreed output reductions.
Some members of the organisation have a history of flouting their own decisions, but a sharp drop in prices means they may be more willing to stick to their quotas this time.
"It is in everybody's interest not to break ranks. The slump is so severe that nobody knows how far it will go," Dourian said.
Despite lower retail fuel prices in major consumer countries such as China and the US, demand continues to weaken, reflecting difficult economic conditions.
China said it will cut its regulated domestic fuel prices for the first time in two years to encourage economic growth.
Currency: Pound sinks to record low, heads toward parity
The pound sank to a record low under 1.05 euros (Dh4.94) yesterday, as the British currency headed towards parity on expectations of further interest rate cuts from the Bank of England, analysts said.
In early afternoon trading, sterling tumbled to 1.0463 euros, which was the lowest point since the creation of the single currency in 1999. However, it later pulled back to 1.0589.
"The recent dreadful news on the UK economy and the fall in US interest rates very close to zero have convinced us that UK interest rates are set to fall even further than we had previously thought," said Capital Economics analyst Jonathan Loynes.
"Rates are effectively heading to zero on this side of the Atlantic too," he added.
Lower interest rates weigh on currencies because they make them a less attractive investment in terms of yields.
The pound had plunged on Wednesday after minutes from the Bank of England's December 4 meeting revealed that policymakers mulled a steeper cut when they voted unanimously to cut rates by a full percentage point to 2 per cent.
Meanwhile, BoE Deputy Governor Charles Bean said in an interview with the Financial Times yesterday that zero interest rates were a "possibility" in Britain.
"We have to recognise that it's a possibility," Bean told the FT business daily.
"Of course, interest rates, the bank rate, is still at 2 per cent, so we still have some margin to go yet, but of course we may find ourselves getting them all the way to near zero."
- Reuters
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