Oil slid more than $5 a barrel on Friday as gloom about a global economic downturn that is sapping fuel demand took the steam out of an OPEC agreement to cut output.
Ministers of the Organization of the Petroleum Exporting Countries agreed at an emergency meeting in Vienna to take 1.5 million barrels a day of crude, about 5% of its supply, off the world market. US light crude for December delivery traded down $3.15 at $64.69 a barrel by 3 p.m.. Earlier it touched $62.65, its lowest since May 2007. It has fallen more than $40 a barrel in a month. London Brent crude was down $3.24 at $62.68.
Saudia Arabia’s Oil Minister Ali al-Naimi said the group had agreed the output reduction with effect from November 1. Traders said OPEC’s action might not be enough to arrest a slide that has seen oil down more than 50% from a record $147 a barrel in July. “Already we’ve seen demand destruction of 2 million barrels per day. I’m not convinced this cut will be enough to stop the slide,” said Rob Laughlin, at broker MF Global. “We need to see what they plan on doing later this year.”
Oil has plunged as the credit crisis hits economic growth and oil demand in the United States, the world’s biggest energy consumer, and other industrial countries. “We believe this week will mark the start of a new quota reduction cycle by OPEC and it will continue through 2009,” Deutsche Bank analyst Michael Lewis said in a note. “However, we believe production cuts will not rescue the oil price,” he said. “We target WTI (US) crude oil prices hitting $50 a barrel next year.”
Analysts polled by Reuters had expected OPEC to reduce output by between 1 million and 1.5 million barrels per day. The International Energy Agency, which advises industrialized consumer countries, was critical of OPEC’s cut. “It’s not a helpful decision because markets are quite nervous,” Eduardo Lopez, senior analyst at the IEA’s oil market division said.
Investors across financial markets are increasingly pessimistic about the world economy, illustrated by sharp falls in European and Asian stocks on Friday, led by around a 10% drop in Japan’s Nikkei average. Britain’s economy, for example, contracted by 0.5% in the Q3 of 2008, evidence that recession is on the way. (Reuters)