Opec cuts fail to stem oil slide

Oil fell below US$40 a barrel for the first time in more than four years, as stocks continued to build.

Oil fell below US$40 a barrel on Thursday, touching $37 for the first time in more than four years as stocks continued to build in the US and investors shrugged off Opec's decision to cut output by a record amount. Analysts said the latest market rout, following a rally earlier in the week, reflected scepticism over the oil exporter group's resolve to implement the 2.2 million barrels per day (bpd) cut it announced on Wednesday at a meeting in Oran, Algeria. Crude continued to fall on the New York Mercantile Exchange, its lowest price since July 2004. Oil is nearly 75 per cent off the record $147.27 a barrel peak it scaled five months ago. "The verdict was a resounding vote of no-confidence," said Edward Meir, a senior commodity analyst with the brokerage firm MF Global. Opec's latest move to slow its members' output followed two previous cuts, totalling 2 million bpd, which it announced in September and October. At an emergency gathering in Cairo three weeks ago, the group postponed further action while it assessed compliance with the earlier decisions. On the sidelines of that meeting, the Opec president, Chakib Khelil, said compliance was about 85 per cent, but independent observers placed it lower, with a consensus around 67 per cent. "Opec reductions still appear behind the curve in catching up to this year's dramatic declines in global demand," said Jim Ritterbusch, the president of the trading advisory firm Ritterbusch and Associates. Analysts said prices would remain weak because of doubts over compliance in the 13-member group. "Countries other than the Saudis are going to have difficulty to comply," said Tetsu Emori, a fund manager at Astmax in Japan. "Those oil producing countries, if they want to survive, they have to produce, even at $40 oil." Oil exporting nations face the choice of maintaining exports at current levels and risk driving the price lower, with critical consequences for their finances, or cutting supplies in the hope of reviving tax revenues. Among Opec members, Iran, Venezuela and Iraq are especially vulnerable because of their lax spending. Iran and Venezuela require oil prices of $90 to $100 a barrel to balance their budgets because of their emphasis on social programmes. Iraq, which is struggling to rebuild infrastructure left in tatters by decades of war and neglect, needs an even higher oil price next year to break even from a fiscal point of view. Angola, an Opec oil exporter included in the UN's list of 46 least-developed countries, with per capita annual income below US$750 (Dh2,755), would also continue to face extreme economic hardship if prices stay low. The UN's list also includes some non-Opec oil exporters such as Sudan and Yemen. "We should ensure that the most vulnerable members of the global community, the least developed countries, are well cushioned from the impact of the present global crisis," Mr Khelil said in his opening speech at Wednesday's Opec meeting. The price slide of the past few months has mostly reflected plummeting demand for oil in the developed world and global economic deterioration that, in the short term, could drive demand down further. Over a longer period, that could jeopardise future oil supplies - as producers delay developing new reserves - and hamper economic recovery by exacerbating oil market instability. "Unfortunately, the world economic outlook is not expected to improve over the winter. The global economy is slowing down faster than expected and, increasingly, forecasters are suggesting that oil demand will fall next year," Mr Khelil said in Oran. "Our latest market analysis shows that the oil price volatility has increased notably since mid-September, following the deepening of the international economic woes. In tandem with this, the pace of the decline in oil prices has accelerated. Prices are now well below levels that could be considered sustainable for the longer term." Echoing the Opec president's pessimism, JP Morgan, the investment bank, pruned its crude price forecast for next year to $43 a barrel from $69 yesterday. The revision followed fresh evidence of falling US oil demand. On Wednesday, the US government released data showing commercial crude stocks had increased. It forecast oil demand growth by the world's top energy consumer of only 0.2 per cent, or 1 million bpd, in the next two decades. In the immediate future, Americans are likely to travel less over the Christmas holiday period for the first time since 2002, the American Automobile Association said. Debate over the right level for oil prices is set to continue today, as the world's biggest producers and consumers confer in London. The meeting was called in June by the British prime minister, Gordon Brown, when crude prices were more than three times their current level. While consumers and producers may struggle to find common ground on the price issue, they are likely to agree on the economic harm caused by market volatility. They may also call for greater market transparency. "The market has been crying out for reliable and timely energy data since the year dot," said Geoff Pyne, an independent oil consultant. "All sides of the oil market would benefit from a source of data on which everyone could rely." Opec said on Wednesday that it would hold its next meeting on March 15 in Vienna. Some analysts suggested an earlier meeting could be warranted, along with another production cut. [e-mail]