Oil prices tumble to near five-year low
By Javier Blas and Ed Crooks in London
Published: December 19 2008 11:07 | Last updated: December 19 2008 13:32
Oil prices on Friday tumbled near to a five-year low, trading below $35 a barrel, amid market doubts that Opec would deliver the full 2.2m barrels a day cut it promised earlier this week and fresh concerns about the global economy.
The drop in prices, which at one point hit their lowest level since February 2004, was exaggerated by the expiry on Friday of the West Texas Intermediate oil contract for January delivery, the main market benchmark.
The fall came as energy ministers from oil producing countries and consumers gathered in London to review the oil market after a similar meeting earlier this year in Jeddah, Saudi Arabia, when oil prices were near $150 a barrel.
Gordon Brown, UK prime minister, told ministers that the most pressing challenge now and for the future was oil price volatility. ”Such volatility is in no-one’s interests,” he said. ”Such fluctuations damage producers and consumers alike.”
Ali Naimi, Saudi Arabia’s powerful oil minister, reaffirmed that a $75 target was ”fair and reasonable” as it was the ”price that marginal producers need to maintain investments sufficient to provide adequate supplies for future oil consumption needs”.
Mr Naimi warned that without the investments ”the world therefore would see extreme swings in prices.” He added: ”Today’s price levels are wreaking havoc on the industry and threatening current and planned investments.”
The drop in prices between the Jeddah and London meetings highlights the rapid global economic slowdown and its impact on oil demand, which this year will fall for the first time in 25 years.
In midday trading in London, West Texas Intermediate oil for delivery in January fell $2.64 to $33.58 a barrel. It earlier touched $33.44, the lowest since early February 2004. The more active February contract, which will become the market benchmark next week, was down 7 cents at $41.70 a barrel.
Ed Meir, of MF Global in New York, said that although Opec had been pedalling furiously this week to keep prices buoyant, the wheels were ”rapidly coming off the markets.”
“At this point, next support is $25, which if reached, will basically complete the meteoric rise and fall of crude prices,” Mr Meir said.
Traders warned, however, that the fall in oil prices might be short-lived and was exaggerated by the expiry of the January WTI contract. They pointed to stronger prices for February and later next year. In addition, they said, a sharp narrowing of the price differential between lower quality, heavy sour crude – such as Dubai oil – and higher quality, lighter, sweeter oil – such as WTI and Brent – was a signal that prices might rebound soon.
Opec’s production cuts are expected to focus on lower-quality oil and that was boosting the price of crude streams such as Dubai, traders said. The spread between Dubai and Brent on Friday narrowed to near a multi-year low of $1.10 a barrel, near the 80 cents record reached in August that was the lowest in almost a decade.
Shokri Ghanem, Libya’s most senior oil official, suggested that the production cuts announced earlier this week in Oran, Algeria, would start to stabilise the oil market once they took effect in early January.
The cartel said it would remove 2.2m b/d on top of the 2m b/d already pledged since September.
Mr Ghanem added that Opec ministers would review the market in January and would decide then whether the cartel might need an extraordinary meeting ahead of its next scheduled gathering in mid-March in Vienna.
Copyright The Financial Times Limited 2008
Record oil cut fails to lift prices
By Carola Hoyos in Oran
Published: December 17 2008 16:05 | Last updated: December 17 2008 17:48
The depth of the world’s economic downturn was highlighted on Wednesday when the Opec oil cartel appeared powerless in its quest to drive up prices even after agreeing a record cut in its production.
Opec, which controls about 40 per cent of the world’s oil supplies, announced a further 2.2m barrel a day cut on top of the 2m b/d it has already pledged since September.
It said it would cut 4.2m b/d from its September output of 29.045m b/d, bringing its production ceiling to 24.845m b/d in January.
Russia said its companies would be forced to cut another 320,000 b/d early next year only if low oil prices persisted.
The oil market, however, took a dim view of Opec’s action, with West Texas Intermediate crude oil for February delivery, the most active contract, down 75 cents to $45.95 a barrel. The January contract, due to expire on Friday, was down $1.73 at $41.88 a barrel.
Nauman Barakat, of Macquarie in New York, said: “A cut of 2.2m b/d is a pretty decent cut but it will take a while for the market to see the Opec cut actually filtering into the market.”
Even Washington questioned whether Opec members would comply fully with the announced cuts.
“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 Tony Fratto, the White House spokesman.
“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,” he said.
But Chakib Khelil, Opec president, said Opec had a long-established record in meeting the challenges it faced.
“We shall rise to this challenge – as in the past – and achieve our objective of stabilising the oil market through collective discipline and adherence to our decisions,” he said.
Opec said on Wednesday the “grave global economic downturn” had led to a destruction of demand for oil and an unprecedented downward pressure on prices. “The conference has observed that the crude volumes entering the market remain well in excess of actual demand. This is demonstrated by the fact that crude stocks in OECD countries are well above their five-year average and are expected to continue to rise.”
Saudi Arabia’s main concern is the rising level of inventories, which can now cover almost 57 days of demand, much higher than the 52 days the cartel would like to see.
High inventories are the starkest physical indication that supply far outstrips demand. They also reduce Opec’s leverage to affect prices because they allow traders the comfort of dipping into inventories if Opec withholds oil.
Opec fears counter-seasonal growth – inventories usually fall in the first quarter when winter hits the western hemisphere, increasing demand for heating oil – would prompt a fall in the oil price even more dramatic and long-lasting than that of the past five months.
“We need to avoid what happened in 1997, that is why we are cutting by 2m a day now,” one senior Opec delegate said.
In 1997-98, oil prices slid to less than $10 a barrel in the Asian financial crisis. Saudi Arabia was slow to see the demand collapse coming, initially arguing for a 10 per cent production increase before agreeing an Opec cut of 1.7m b/d, the largest single cut enacted until now. But oil prices were slow to recover, taking a decade to reach the $147 record of July.
Copyright The Financial Times Limited 2008