Business | Oil & Gas
Opec cut fails to boost price of oil
Oil fluctuated around $42 (Dh154.27) on Wednesday despite the announcement by Opec of a bigger-than-expected cut in oil output in an attempt to halt a collapse in the market.
- Agencies
- Published: 23:27 December 17, 2008
London: Oil fluctuated around $42 (Dh154.27) on Wednesday despite the announcement by Opec of a bigger-than-expected cut in oil output in an attempt to halt a collapse in the market.
Opec Secretary-General Abdullah Al Badri said the group agreed in the Algerian city of Oran to make its deepest output cut ever to counter slumping demand and falling oil prices.
The 4.2 million barrels per day (bpd) reduction in supplies was based on September production levels, he said.
Iraqi Oil Minister Hussain Al Shahristani said Opec's decision added 2.2 million bpd of new cuts from January on top of 2 million bpd of restraints agreed at the group's previous two meetings.
"This appears to be a more positive cut than the market was expecting," said Rob Laughlin, analyst at MF Global.
But the oil market's reaction was mixed. Traders had expected a cut of at least 2 million bpd and several had hoped that oil producing countries that are not part of Opec might have weighed in to support the Opec cut to help bolster prices.
Major pullback
Light, sweet crude for January delivery fell nearly 5 per cent, or $2.07, $41.53 on the New York Mercantile Exchange. US gasoline inventories continued to rise, the government reported, providing further evidence of a major pullback by American motorists.
In London, February Brent crude rose $2.15 to $46.71 a barrel on the ICE Futures exchange The February US crude contract was up 24 cents at $46.94.
London Brent crude for February delivery was up 69 cents at $47.34.
Oil prices have tumbled more than $100 from the July all-time record above $147 a barrel as financial turmoil has slowed global economic growth and hit fuel demand.
Opec is desperate to halt the slide in prices. Economists say that at $40 per barrel, 11 of Opec's 12 members, as well as Russia and Mexico, face budget deficits.
Opec had already agreed to cut output by 2 million bpd at two previous meetings, but demand has fallen faster and stocks of oil are building up. Opec said 45 million barrels of crude oil are currently being stored at sea on oil tankers.
In its monthly oil market report, Opec said on Tuesday the first drop in world oil demand in 25 years would sharply lower the need for Opec crude in 2009, opening the door for a substantial production cut at its meeting.
Leading a high level delegation, Russia's Deputy Prime Minister Igor Sechin said in a speech to Opec that Moscow did not plan to join in coordinated output cuts and did not want to join the group. Oil below $50 is uncomfortable for all producing nations, but especially for Opec members Venezuela and Iran which are dependent on higher prices to fund ambitious domestic programmes.
It is hoped a sharp supply cut will put oil on the path towards $75.
"You must understand the purpose of the $75 price is for a much more noble cause," the Saudi Oil Minister said. "You need every producer to produce and marginal producers cannot produce at $40 a barrel.
"Therefore we believe $75 is probably more conducive to marginal producers to continue so we don't have a shortage in the market and we avoid the future rocketing of prices."
Analysts said a limited recovery in prices would put a bit more strain on a recessionary global economy, but imay help pull the world back from the brink of deflation — a growing source of concern.
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