Crude Oil Prices Sliding Despite Production Cuts

Oil prices slid yesterday to a four-and-a-half-year low as worries about a global economic slump overshadowed recent attempts by oil-producing nations to prop up prices with steep production cuts.

The price of a barrel of light, sweet crude oil for January dropped 6.5 percent to close at $33.87 on the New York Mercantile Exchange.

The decision Wednesday by the Organization of the Petroleum Exporting Countries to cut production by 2.2. million barrels a day starting in January has done little to halt the slump in prices, as traders have given more weight to the deteriorating condition of the global economy and the resulting drop in oil demand.

The production cuts are "going to be overwhelmed by the economic slowdown," Energy Department economist Neil Gamson said.

Global demand for oil is expected to shrink this year and in 2009, the first time in 30 years that demand has contracted two years in a row, the Energy Department said in its Dec. 9 Short-Term Energy Outlook report.

Some analysts said oil prices have further to fall. David Kirsch, manager of market intelligence for PFC Energy, a Washington consultancy, said crude prices could plunge below $30 a barrel until demand for oil rises significantly -- an event that "is not likely to come before the first signs of recovery in the global economy, and that is probably not going to happen until the second half of next year."

An uptick in U.S. demand for oil isn't likely until April at the earliest, when the driving season begins, according to Gamson. Even then it probably won't go up by much. The Energy Department forecasted that oil prices will largely stay flat in 2009, regardless of what OPEC does.

OPEC officials said yesterday they would keep reducing output until prices stabilize. OPEC president Chakib Khelil said at the London energy meeting, a gathering of oil-consuming and producing nations, that OPEC may meet in Kuwait City on Jan. 19 to discuss more production cuts. OPEC produces 40 percent of the world's oil supply.

But economists said it would be difficult for some oil-producing countries to cut supplies significantly. Venezuela, for instance, is already having problems balancing its budget. John Felmy, chief economist at the American Petroleum Institute, an oil industry trade group in Washington, said the drop in prices -- down from a peak of $147.27 per barrel in July -- may reflect doubts among traders that OPEC can live up to its promises.

Traders are betting that the price of oil will rise in 2009. Indeed, the price of a barrel of light crude for February closed yesterday at $42.36, nearly $10 higher than the price for January. The unusually big gap encouraged some companies to stockpile oil at the lower price in order to sell it later at a profit or sell futures contracts at the higher price. The result, however, is that "storage levels in certain places are so high right now you can't find places to put oil," said Phil Flynn, an energy analyst with Chicago-based futures brokerage firm Alaron Trading Corp. Stockpiling has not raised oil prices because there is so much supply in relation to demand.

Last week, inventory at Cushing, Okla., where light crude oil that is traded on the New York Mercantile Exchange is stored, reached near-record highs, the Energy Department said in a recent report, another sign of weak demand.

Falling prices have led to the delay or cancellation of orders for new oil rigs, one major oil services company said, although the oil industry's biggest players are going ahead with some projects. Royal Dutch Shell has said it would continue building a mine in Canada, but has postponed final investment decisions on a future expansion.

By contrast, lower crude prices may provide relief for companies that turn oil into gasoline. For a few weeks this fall, oil refiners lost money as demand for gasoline fell faster than the price of crude, squeezing profit margins. With demand for gasoline still weak, many refiners have cut production. Valero Energy, the nation's largest refiner by capacity, has cut gasoline production at 10 of its 16 refineries. Lower crude prices have improved refiners' margins, even though prices at the pump are low.

The national average for a gallon of gasoline yesterday was $1.67, said John Townsend, a spokesman for AAA Mid-Atlantic.

"We are much happier with a gallon of gasoline at $1.60 than at $4," said Valero spokesman Bill Day. "High prices are bad for business."