Oil slides 8 percent as OPEC cut seen too little

By Richard Valdmanis


NEW YORK (Reuters) - Oil prices dropped to their lowest in more than four years on Wednesday after OPEC announced a record supply cut that dealers said may fail to fully offset slumping world energy demand.

U.S. crude oil prices fell $3.54 to settle at $40.06 a barrel after dipping below $40 for first time since July 2004. London Brent fell $1.12 to $45.53.

Oil prices have fallen more than $100 since July as a global financial crisis cuts into consumer and industrial fuel demand, and top forecasters are now predicting the first decline in world energy use since 1983.

The Organization of the Petroleum Exporting Countries, eager to push prices back up, announced on Wednesday an agreement to cut 2.2 million barrels per day of output starting January 1, the biggest single reduction on record.

The agreed cut was slightly bigger than expected and will add to previous OPEC cuts of 2 million bpd since September (ID:nLH679526). But oil dealers focusing on the global economic downturn reacted coolly.

"It seems like, despite the fact that the economies of producer nations are clearly in trouble, they don't have the temerity to actually go ahead and do the kind of cut that would be really interesting to traders to turn this around," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

The White House, which has been fighting to rescue the U.S. economy from a severe slowdown, called OPEC's decision to cut production "short sighted" and said the oil cartel has an obligation to keep the market well supplied.

"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 spokesman Tony Fratto.

"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.

OPEC, however, is desperate to halt the slide in prices with economists predicting 11 of OPEC's 12 members, as well as big producers Russia and Mexico, will face budget deficits with crude oil at $40 a barrel.

The slump in prices has already sent shock waves through oil producer countries and top companies, leading to cutbacks and delays in spending on key projects that had promised to boost future world output.

Energy analysts said that despite the market's initial reaction, OPEC's cuts could bolster prices in the longer run if members comply and demand falls less than expected.

"The biggest question about how effective this agreement will be is just how much demand will contract," said Sarah Emerson, director of Energy Security Analysis Inc in Boston. "I think OPEC is showing that they have strong intentions to support prices."

Oil's losses on Wednesday came amid continued weakness in U.S. stock markets as economic gloom overshadowed government efforts to stimulate growth, including this week's move by the Federal Reserve to slash interest rates.

The soft energy market has also led oil refiners in the United States, the world's biggest energy consumer, to slow down fuel production to match weak demand.

The U.S. Energy Information Administration said the nation's crude and refined fuel stockpiles rose last week as a demand slump led refiners to run less oil.

Auto group AAA said on Wednesday that U.S. travel over the Christmas holidays will fall more than 2 percent this year, the first decline since 2002.