Output cut fails to spur oil price

Crude prices stay around $40 a barrel despite largest ever production cut.

Opec meeting
Ministers gathered in Oran said continued price falls could harm investment in the energy sector [AFP]

At one point the price was as low $39.88, a price not seen since July 2004.

The decline in oil prices from a high of around $150 has slashed revenues for Opec’s members and raised fears of a future supply crunch as investors pull money from costly exploration and production projects.

Crude prices have fallen so low that producers have leased supertankers to store the oil at sea, hoping that demand will rebound.

“There’s just so much oil in inventory out there right now,” Michael Lynch, president of Strategic Energy & Economic Research, said.

“Nobody wants to buy this stuff.”

Reduced demand

Opec, which produces about 40 per cent of the world’s oil, approved a cut of more than two million barrels, leaving the level of production down 4.2 million barrels from September.

Oil demand has dwindled in recession-hit industrialised nations, and the cut was endorsed by many Opec members before the meeting in Oran in an attempt to stabilise the price.

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Oil cut is ‘necessary’

“If unchecked, prices could fall to levels which would place in jeopardy the investments required to guarantee adequate energy supplies in the medium to long term,” a statement released by Opec said.

Khelil said that the $75 a barrel price target set by King Abdullah, Saudi Arabia’s monarch, was a “fair price”.

But the apparent failure of the move to restore market confidence was a clear indication that investors remain cautious that the world is in for a long, painful recession during which energy use will continue to fall.

“You’ve got a commodity that people are buying less of because they can’t afford to buy more,” Phil Flynn, an analyst at Alaron Trading Corp, said.

“People are fearful. They have a lack of confidence in the economy. They are closing their factories.”

Development and investment

Saadallah al-Fathi, an oil analyst based in Dubai, told Al Jazeera: “Raising oil prices will impact a lot of people in the oil-producing countries and make it possible for them to continue with their development and with their investment in the oil industry to provide more oil for the world in the future.

“You’ve got a commodity that people are buying less of because they can’t afford to buy more”

Phil Flynn,
analyst at Alaron Trading Corp

“At the same time, they have to be cognisant of the state of the economy in the world, and they have to help the world in getting out of the recession.”

There had been speculation the Opec cut could be combined with a reduction of 600,000 barrels a day by non-Opec members Russia and Azerbaijan.

However, Moscow is reported to have distanced itself from direct ties with Opec, dampening hopes of further co-ordinated production cuts.

Although Igor Sechin, the Russian deputy prime minister, and Natik Aliev, the Azeri energy minister, announced the 600,000 barrel cut, their reductions appeared to be largely symbolic.

Russia indicated its reduction had already been implemented back in November, while Azerbaijan said its output had been reduced by a third because of production problems earlier in the year.

Source: Al Jazeera, News Agencies