OPEC Agrees to Slash Output, but Oil Prices Slide Anyway
Thursday, December 18, 2008
The Organization of the Petroleum Exporting Countries yesterday agreed to cut production by 2.2 million barrels a day, slightly more than expected, and called on oil producers outside the group to join in output cuts in a bid to halt the five-month slide in world oil prices.
But prices continued to fall as traders bet that OPEC's reductions would not be big enough to offset the steep decline in demand resulting from the slumping world economy. Moreover, many analysts expect that OPEC members will cheat and that actual cuts in production will fall short of the group's target.
By the end of trading, the price of light, sweet crude oil for January delivery fell $3.54 a barrel, to $40.06, on the New York Mercantile Exchange. The drop in prices came even though the value of the U.S. dollar fell sharply; that usually drives up the price of oil, which is denominated in dollars.
"The market is reflecting the reality that without demand, the price isn't going to go up," said Adam Sieminski, chief energy economist for Deutsche Bank. "OPEC is pushing on a string."
OPEC's struggle against sluggish demand could be long-lasting, at least in the United States. The Energy Department's Energy Information Administration yesterday projected "virtually no growth in U.S. oil consumption" through 2030, reflecting the combined effect of recently enacted fuel-efficiency standards for new vehicles, requirements for increased use of biofuels and an assumed rebound in oil prices as the world economy recovers.
Despite falling prices at the pump, U.S. motor-fuel demand in November dropped 7.4 percent from a year earlier, according to the American Petroleum Institute, reaching the lowest level for that month since 1998.
Many oil experts doubted whether the 13 members of OPEC would deliver on their pledge to take that much oil off world markets. Saudi sources said that the kingdom, which is OPEC's biggest producer, expected to make cuts amounting to a "bit more than a third" of the OPEC target, bringing its output to 8.05 million barrels a day. That would leave about 1.4 million barrels a day of cuts to be made by the other OPEC members -- including countries such as Venezuela and Iran, which have pushed for higher prices but have often been reluctant to pare output.
"It is still unlikely that the second round of cuts will be substantially implemented by other members, particularly with the budget pressures they are facing," said a report by the Eurasia Group, a consulting firm.
The cuts are scheduled to go into effect Jan. 1. OPEC accounts for 40 percent of world oil production.
Pointing to sagging demand, OPEC said it was adding to cuts made in October. The new quota of 24.845 million barrels a day is 4.2 million barrels lower than the actual production level in September. (Two members, Indonesia and Iraq, are not included in the quotas.)
"The global economy is slowing down faster than expected, and, increasingly, forecasters are suggesting that oil demand will fall next year," Chakib Khelil, Algeria's energy minister and OPEC's president, said in the text of an opening statement to the ministers meeting in Oran, Algeria.
OPEC members also portrayed the efforts to prop up prices as an attempt to help themselves and world oil consumers alike by establishing a price level high enough to provide incentives for future exploration and production investments.