Opec's supply cut fails to halt sharp drop in oil prices

OIL PRICES dropped to their lowest in more than four years yesterday after Opec announced a record supply cut that dealers said may fail to fully offset slumping world energy demand.

US crude oil prices fell $3.54 to settle at $40.06 a barrel after dipping below $40 for the first time since July 2004. London Brent fell $1.12 to $45.53.

Oil prices have fallen more than $100 since July as the global financial crisis cuts into consumer and industrial fuel demand. Forecasters are predicting the first decline in world energy use since 1983.

The Organisation of the Petroleum Exporting Countries (Opec), eager to push prices back up, announced an agreement to cut 2.2 million barrels per day of output from January 1st, the biggest single reduction on record.

The agreed cut was slightly bigger than expected, and will add to previous Opec cuts of 2 million barrels per day since September. However, oil dealers focusing on the global economic downturn reacted coolly.

“It seems like, despite the fact that the economies of producer nations are clearly in trouble, they don’t have the temerity to actually go ahead and do the kind of cut that would be really interesting to traders to turn this around,” said Addison Armstrong, director of market research at Tradition Energy.

The White House, which has been fighting to rescue the US economy from a severe slowdown, called Opec’s decision to cut production “short-sighted” and said the oil cartel has an obligation to keep the market well supplied.

“It’s not clear that OPEC’s actions will be effective given the shift in global demand and the ability of OPEC members to meet the cartel’s targets,” said spokesman Tony Fratto.

“Regardless, Opec has an obligation to keep the market well supplied and to consider the health of the global economy, so efforts to limit the benefits of lower energy prices are short-sighted.”

Opec, however, is desperate to halt the slide in prices, with economists predicting 11 of Opec’s 12 members will face budget deficits with crude oil at $40 a barrel. – (Reuters)