Oil price at $40 despite OPEC cut

U.S. crude hovered near $40 a barrel on Thursday, around its lowest price since July 2004, amid doubts in OPEC’s ability to curb output quickly after the group announced record production cuts.

Oil is $107 off its July peak, shedding value as the onset of a global recession cuts into fuel demand. Top forecasters now predict the first decline in world energy use since 1983.

“The verdict was a resounding vote of no-confidence in the (OPEC) cartel’s ability to curtail production given its previous tendencies to backslide on commitments,” said Edward Meir of MF Global in a research note.

U.S. light crude for January delivery tumbled nearly 8 percent on Wednesday as traders dismissed OPEC’s 2.2 million barrel per day (bpd) output cut, decided in Algeria.

The contract touched $39.19 on Thursday, its lowest price since July 2004, and was trading up 24 cents at $40.30 a barrel by 5:02 a.m. EST.

London Brent crude for February rose 38 cents to $45.91.

The cut announced by the Organization of the Petroleum Exporting Countries on Wednesday is its third since September.

For those curbs to be effective the fractious group will need to enforce compliance, historically a tricky task in a falling market. OPEC itself estimates November production cut compliance by its members at around 50 percent.

“Countries other than the Saudis are going to have difficulty complying with this cut. Those oil producing countries, if they want to survive, they have to produce, even at $40,” said Emori.

And the outlook for next year grows bleaker by the day as economic indicators show a deep global recession taking hold, causing oil demand to fall from the United States to China.

JP Morgan cut its 2009 crude oil forecast to $43 a barrel from a previous $69 a barrel expectation following OPEC’s cut, and many analysts say more losses could be in store until more supply is taken off the market or demand starts to level off.

“Prices have to head lower, now that we are through $40. As long as demand continues to weaken, prices will weaken too,” Emori added.

Traders also took their cue from U.S. crude oil and refined fuel stocks, which rose last week as imports of oil products increased, while domestic refiners cut output due to soft demand.

Commercial crude oil stocks in the United States rose 500,000 barrels to 321.2 million, the Energy Information Administration said.

It also said oil demand in the world’s top consumer was expected to grow by only 1 million bpd over the next two decades, or 0.2 percent a year, as higher vehicle fuel standards and increased use of renewable fuels stifle consumption.

Credit: Chris Baldwin
Source: AP

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