Oil prices drop on production cut talks

January 15, 2009 10:00:00 PM PST
Oil prices fell Tuesday after OPEC powerhouse Saudi Arabia said oil production would be cut by 2 million barrels a per day to stem declining crude prices. [SIGN UP: Get headlines and breaking news sent to you]

OPEC has hinted that it may have to "shock" markets with a production cut and oil traders and brokers appear to have expected hints of a more severe reduction.

"OPEC has been sending signals to the market for weeks calling saying a major production cut is on the way," said Phil Flynn, analyst at Alaron Trading Corp. "It's sort of like getting excited for a Christmas present. Obviously, the market wanted a bigger present."

Light, sweet crude for January delivery fell 23 cents to $44.28 a barrel in electronic trading on the New York Mercantile Exchange.

Oil prices, which had been up close to $1 all morning, fell below $44 just after Saudi oil minister Ali Naimi said production would likely be cut by about 2 billion barrels per day.

The Organization of Petroleum Exporting Countries, which accounts for 40 percent of global supply, is not expected to make an official announcement about production levels until Wednesday.

OPEC has struggled to halt falling crude prices as demand falls away.

On Tuesday, OPEC predicted demand for its crude oil fell by 700,000 barrels per day this year, and will drop by at least twice that amount in 2009 as the worsening global economy "is expected to have a strong impact on oil demand."

Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, said OPEC likely will need to install a series of production cuts to get the attention of investors.

"Most people are looking at 2009, and they just see the most rugged first 100 days to start any year that most of us have seen in our lifetime," Kloza said.

Demand for gasoline tends to suffer during the cold winter months anyway, Kloza said, and as the economy sheds hundreds of thousands of jobs at the start of the new year, the drop in U.S. demand could be "as extensive as we've seen this decade."

Kloza expects oil prices will dip below $40 in early 2009.

The severe drop in energy costs pushed down consumer prices in November by the largest amount on records that go back 61 years, according to the Labor Department.

A drop in prices for goods and services might sound good for consumers, but they also can force companies to slow production and cut jobs.

In response, economists expect the Federal Reserve to cut the federal funds rate, already at a low of 1 percent, by another half-point Tuesday afternoon in an effort to keep the recession from worsening.

OPEC members have repeatedly spoken of production cuts to bring the price of crude back up. Oil producing nations are struggling with public works projects based predominantly on sales of crude.

Venezuela's energy minister, Rafael Ramirez, called for a consensus on a "significant cut" which he said should be of between 1 million to 2 million barrels per day.

Investors will be watching for evidence OPEC members are adhering to any announced cuts, as exceeding quotas has dogged the organization throughout its history.

Whether any announced cuts to production will stabilize oil prices remains to be seen. Two previous OPEC cuts amounting to 2 million barrels a day earlier this year have done little to stem the slide amid the worst economic downturn in decades.

Oil prices, which reached a four-year low at $40.50 earlier this month, have fallen about 70 percent since peaking at $147.27 in July.

"The market is still consumed with demand-side factors," said Gerard Burg, minerals and energy economist with National Australia Bank in Melbourne. "We don't expect a recovery until the second half of next year, so there's potential for further negative news to have a dampening affect on the crude market."

In the United States retail gasoline prices rose again after the first reported rebound in nearly three months over the weekend.

There is a lag between movement in crude and gasoline prices because it takes at least several weeks to refine oil to make fuel.

The national average for regular gas rose to $1.6661 a gallon, just above the $1.6660 reported the day before, according to auto club AAA, the OPIS and Wright Express.

Gasoline prices fell in Europe, according to data released late Monday by TCS, the Swiss automobile club.

In Germany, Europe's largest economy, a liter of regular unleaded dipped to 1.132 euros ($1.54) or about $5.85 per gallon, which is 3.8 liters. On Dec. 1, it was 1.166 euros per liter.

In France, a liter of regular unleaded cost 1.110 euros ($1.51), down from 1.155 euros two weeks ago, while in Great Britain it cost 0.894 pounds ($1.36) compared to 0.915 pounds.

In London, January Brent crude rose 48 cents to $45.08 a barrel on the ICE Futures exchange.

In other Nymex trading, gasoline futures rose 1.59 cents to $1.0528 a gallon. Heating oil gained 1.89 cents to $1.479 a gallon while natural gas for January delivery gained 10 cents to $5.745 per 1,000 cubic feet.

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