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Thu 18 Dec 2008 07:44 AM

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Oil falls below $40 as OPEC cut has little impact

UPDATE 1: Oil price at near four-year low as slowing demand trumps output cut.

Oil extended its losses to below $40 a barrel on Thursday, near its lowest in more than four years, as rising US crude inventories and further evidence of slowing demand trumped OPEC's biggest ever production cut.

Oil has nose-dived since its July all-time peak above $147, shedding almost three quarters of its value as the global financial turmoil cuts into fuel demand. Top forecasters are now predicting the first decline in world energy use since 1983.

US light crude for January delivery, which expires on Friday, fell 42 cents to $39.64 a barrel by 10am UAE time, after falling to $39.19 earlier in the session, the lowest since July 2004, and following an eight percent overnight drop.

London Brent crude for February shed 43 cents to $45.10.

JPMorgan cut its 2009 crude oil forecast to $43 a barrel from a previous $69 a barrel expectation following OPEC's cut.

The Organization of the Petroleum Exporting Countries, eager to build a floor under dipping prices, announced on Wednesday it would cut 2.2 million barrels daily of output starting Jan. 1, slightly more than expected.

It comes on the heels of 2 million barrels a day (bpd) of cuts since September, but instead of boosting oil prices, it deepened the gloom over demand.

"Countries other than the Saudis are going to have difficulty to comply with this cut. Those oil producing countries, if they want to survive, they have to produce, even at $40 oil," said Tetsu Emori, fund manager at Astmax Co Ltd in Japan.

According to independent observers cited in OPEC's monthly report on Tuesday, the group's compliance in November to existing cuts was only just over 50 percent.

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

A prolonged period of cheap prices could slow new investment, crimping supply, a stark turnaround just months after worries that high prices were eating into demand.

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.

Traders also took their cue from US crude oil and refined fuel stocks, which rose last week as imports of oil products increased, while domestic refiners curbed output rates in the light of soft demand.

Commercial crude oil stocks in the United States were up 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, or 0.2 percent, over the next two decades, as higher vehicle fuel standards and increased use of renewable fuels stifle petroleum consumption.

Americans are likely to travel less for the Christmas holiday period for the first time since 2002, travel and auto group AAA said.

US shares fell on Wednesday, prompting Japan's Nikkei to inch lower as well on Thursday, as investors wondered what tools were left to tackle the year-long recession after the Federal Reserve on Tuesday cut rates to their lowest on record.

The cut has sent the US dollar tumbling against major currencies, hitting the weakest in more than 13 years against the yen on Wednesday. (Reuters)

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Andre 11 years ago

Why should the consumer - who are not consuming so much anymore (for obvious reasons) - fill the coffers of OPEC countries? As you quoted the Saudi Oil Minister Ali al-Naimi in your previous article (OPEC agrees to record oil output cut): "The purpose of the cut is to bring the market into balance and avoid the gyrations of the price..../.....The cut may lead to higher prices or may not."

Michael 11 years ago

Why is it that when prices were $35-45 a barrel just a few short years ago, it was NOT a problem? Then the recession was beginning and prices went to $75 a barrel and the news talked all about it being so HIGH. Then the recession built up speed and hit $100 and it was the highest EVER! Then $125, $147 blah, blah, blah. So, now that oil has dropped back to its ORIGINAL, and NORMAL pricing before the increases that happened so quickly, why it it such a BAD THING for oil to be AFFORDABLE again? Riddle me that Batman...

Cathy 11 years ago

It just goes to show you how greedy opec really is about raising the price of crude oil. We are their number 1 consumer, and they finally see were not using as much as we used to, so now they can't buy as many new trinkets as they did in the past. It sickens me to see how much the oil companies were making each quarter in profits. How disgusting, and how greedy have we all become. I for one am very happy to see prices be NORMAL for a change. This is where it really should have been all along, not inflated like it was.

Rick V. Macys 11 years ago

Those OPEC "Fat Cats" got used to all the extra money they were getting, and using, for lavish projects, such as "Dubai", now they are feelin' what we felt from paying such high prices for gasoline, by not getting their "easy money"! We ought to be charging you $147.00 for a bushel of wheat so you could feel the pinch for a while.

cully lee 11 years ago

Big oil business trying to get the prices back up by cutting the production . Then the U.S.A. should cut back the production on food we send over seas . If they want to raise the oil prices , then we should raise the food prices . Food supply is the greatest resource there is and we need to use it to our advantage more.