Oil markets brush off OPEC's big cut

Oil markets brush off OPEC's big cut

Investors are unimpressed despite cartel's massive production cuts, sending oil below $40 (U.S.) for first time in five years

SHAWN MCCARTHY

GLOBAL ENERGY REPORTER

December 18, 2008

OTTAWA -- Oil markets gave a sharply negative review yesterday to OPEC's decision to slash production by a further 2.2 million barrels a day, as crude prices fell below $40 (U.S.) a barrel for the first time in more than five years.

At a meeting in Algeria, ministers from the Organization of Petroleum Exporting Countries agreed to cut supplies by a total of 4.2 million barrels a day below September levels. The cartel had already agreed to rein in production by two million barrels at two separate meetings this fall.

However, traders responded to the largest OPEC cut yet by driving down the price of crude, and analysts said the action was too little, too late to prevent a further erosion in oil prices early next year.

"Markets are saying, it's not enough, it's insufficient" said Dina Cover, commodity economist with the Toronto-Dominion Bank.

Pointing to the prospect of an actual drop in oil demand next year, Ms. Cover recently forecast oil prices to slump to as low as $25 (U.S.) a barrel, and to average $30 (U.S.) in the second quarter of next year.

And OPEC's new production targets don't change that view, she said yesterday.

"We expect demand to fall a lot further and OPEC will probably have to cut again."

In New York yesterday, the price of light, sweet crude fell 8 per cent or $3.54 (U.S.) a barrel to $40.06, after trading as low as $39.88.

In their communiqué, OPEC ministers said that, "if unchecked, prices could fall to levels which would place at jeopardy the investments required to guarantee adequate energy supplies in the medium-to-long term."

Traders remain skeptical that OPEC will actually meet its targeted, 4.2-million-barrel reduction, said David Kirsch, energy analyst with PFC Energy.

The cartel has not fully implemented the two-million-barrel cut announced in two stages this fall, and gave little indication of how individual members are expected to comply with the latest round.

"OPEC has got its work cut out for it, and there is very much a question of OPEC's ability to carry through on its agreement," Mr. Kirsch said.

The cartel called on non-OPEC producers to help maintain the stability of global oil markets by reining in production. Several countries, including Russia, Azerbaijan and Syria sent observers to the meeting, but made no commitment to impose cuts.

Russian Deputy Prime Minister Igor Sechin instead told the meeting that Russian producers had already cut production this fall and would do so again if market conditions warranted.

It would have been helpful in the communiqué if Russia had come out and indicated it would cut production," Mr. Kirsch said.

"But [Mr.] Sechin's statement merely reflected what the markets already knew," he said. "If oil prices remain at low levels - and more importantly, if the financial straits that a lot of Russian oil companies find themselves don't ease soon - Russian output is going to fall a further 300,000 to 500,000 barrels a day."

Saudi Arabia has once again emerged as the key producer that must adjust its volumes to market conditions. Last spring, when prices were climbing to record levels, the Saudis faced considerable pressure from oil-consuming nations to boost production.

And now, it will be up to the world's largest exporter to absorb much of the production cuts. The alternative is to allow prices to slump even further than currently projected, forcing higher-cost producers, including those in Canada's oil sands, to reduce output and scale back investment.

OPEC OUTPUT CUT

OPEC oil ministers agreed yesterday to remove a record 2.2-million barrels per day from oil markets in a race to balance supply with the world's rapidly crumbling demand for fuel.

OPEC OUTPUT

Million barrels per day (mb/d)
Jan. '07 26.92
Jan. '08 29.89
Aug. '08 30.4
Nov.*'08 28.07

Note: OPEC 12 includes Angola and Ecuador.

* Indonesia leaves OPEC at the end of 2008 and is excluded from quota from Nov. 2008.

BRENT CRUDE PRICE

Weekly close, $U.S.
Jan. 7/07 $55.64
Jan. 6/07 $96.79
Jul. 13/08 $144.49
Dec. 17/08 $47.90

REUTERS/THE GLOBE AND MAIL66 SOURCE: THOMSON REUTERS