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Oil slips as markets question impact of output cut - ASHARQ AL-AWSAT English Archive
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VIENNA, Austria (AP) – Oil prices slipped below $43 Tuesday as investors questioned whether a big production cut, expected to be announced by OPEC next week, will be able to curb crude’s stunning 70 percent free-fall over the past five months.

Expectations of the output cut have helped oil prices come off 4-year lows touched last week, but analysts are now wondering how large an impact it can have as the global economy struggles with recession.

The fall in oil prices was limited somewhat by news that President-elect Barack Obama plans to implement a major infrastructure program to help boost employment in the weakening U.S. economy.

“With all the stimulus packages and output cuts by OPEC, we may see the oil price stabilizing,” said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

Light, sweet crude for January delivery fell 74 cents to $42.97 a barrel on the New York Mercantile Exchange by noon in Europe. The contract fell overnight $2.90 to settle at $43.71.

Prices fell last week to an intraday low of $40.50, the lowest since December 2004.

“Oil should find support around $40 a barrel and should form a bottom there,” said Aaron Smith, who helps manage about $1.7 billion as managing director at Superfund Financial in Singapore.

Smith, who uses technical analysis to help guide his investment decisions, has recently reduced bets that the price of oil will go down, known as shorting. “We’ve reduced the size of our short positions in oil dramatically over the last couple months,” said Smith, who invests half his fund in commodity futures contracts. “But

if it breaches that $40-$41 level, it could really keep moving.”

Investors are watching for signs of how much the Organization of Petroleum Exporting Countries may reduce output quotas at the group’s meeting next week in Algeria.

OPEC President Chakib Khelil told the AP Saturday the group could announce a “severe” production cut and suggested the cartel could seek to surprise the market with the size of the reduction in a bid to bolster prices.

OPEC, which controls about 40 percent of world crude supplies, announced a production cut of 1.5 million barrels a day in October and 500,000 barrels in September, moves investors brushed off as a global economic slowdown worsened.

OPEC will have to adhere to any promised output cut if it hopes to help reverse the fall in oil prices, said Shum. “I think OPEC will need to make a cut of at least 2 million barrels a day,” Shum said. “I think pricing going down to $40 last week will galvanize OPEC to make a substantial cut and comply better with their targets.” “But you can announce all the cuts you want. Compliance is the key.”

In heartening news to U.S. consumers, the Energy Information Administration revised its short-term energy outlook Wednesday to reflect the steep drop in crude oil prices over the past five months.

It said people using fuel oil can expect to pay on average $1,694 during this winter’s heating season, a 13 percent increase over last winter. But that’s nearly $700 less than what was projected by the agency only a month ago.

The 58 million households that heat by natural gas will pay only slightly more than last year, an estimated $889 for the October through March heating season, an increase of 3.6 percent compared with last year.

While natural gas often mirrors oil prices, some of the savings from declining wholesale gas prices will not be passed on to consumers because much of the gas they will use was bought by utilities last summer, when prices were high, and put into storage.

Meanwhile, the agency projects gasoline prices to average $2.37 a gallon at the pump next year, compared with $2.22 a gallon last week and national average high of $4.11 early last July.

On Tuesday, gasoline futures slipped by more then 2 cents to 94 cents gallon. In other Nymex trading, heating oil was down nearly 2 pennies at $1.47 a gallon while natural gas for January delivery lost almost 4 cent to fetch $5.53 per 1,000 cubic feet.

In London, January Brent crude dipped 31 cents to $43.11 on the ICE Futures exchange.

Asharq Al-Awsat

Asharq Al-Awsat

Asharq Al-Awsat is the world’s premier pan-Arab daily newspaper, printed simultaneously each day on four continents in 14 cities. Launched in London in 1978, Asharq Al-Awsat has established itself as the decisive publication on pan-Arab and international affairs, offering its readers in-depth analysis and exclusive editorials, as well as the most comprehensive coverage of the entire Arab world.

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