Crude prices sink with talk of production cuts

Associated Press

Oil prices fell Tuesday after OPEC powerhouse Saudi Arabia said oil production would be cut by 2 million barrels per day to stem declining crude prices.

OPEC, expected to slash production levels today, has hinted that it may have to “shock” markets to stabilize prices. But oil traders and brokers appear to have expected talk of an even bigger cut.

“OPEC has been sending signals to the market for weeks saying a major production cut is on the way,” said Phil Flynn, analyst at Alaron Trading Corp. “It’s sort of like getting excited for a Christmas present. Obviously, the market wanted a bigger present.”

Also Tuesday, the Federal Reserve cut its target for a key interest rate to the lowest level on record and pledged to use “all available tools” to combat a severe financial crisis and prolonged recession.

The severity of the downturn in the U.S. has led to a sharp drop-off in oil prices.

Light, sweet crude for January delivery fell 91 cents to settle at $43.60 a barrel on the New York Mercantile Exchange.

Stephen Schork, an oil analyst and trader, said crude production and interest rate cuts do not have the same pull on prices as they had earlier this year.

“They’re out of ammo,” Schork said.

“The banks still aren’t lending to each other. And if they can’t do that, you’re not going to grow,” he said. “If you’re not going to grow, demand is only going to fall further.”

On Tuesday, OPEC predicted demand for its crude oil fell by 700,000 barrels per day this year, and will drop by at least twice that amount in 2009 as the worsening global economy “is expected to have a strong impact on oil demand.”

Oil prices, which had been up close to $1 all morning, fell below $44 just after Saudi oil minister Ali Naimi said production would likely be cut by about 2 million barrels per day.

The Organization of Petroleum Exporting Countries, which accounts for 40 percent of global supply, has struggled to halt falling crude prices as demand falls away.

Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, said OPEC likely will need to install a series of production cuts to get the attention of investors.

“Most people are looking at 2009, and they just see the most rugged first 100 days to start any year that most of us have seen in our lifetime,” Kloza said.

Demand for gasoline tends to suffer during the cold winter months anyway, Kloza said, and if more jobs are cut to start the year, the drop in U.S. demand could be “as extensive as we’ve seen this decade.”

Kloza expects oil prices will dip below $40 in early 2009.

Data released Tuesday by MasterCard SpendingPulse for the week ended Dec. 12 showed that Americans continue to cut their consumption of gasoline despite a drop in prices. The SpendingPulse report showed that motorists bought 5.4 percent less gas for the week compared with the same period last year.

That trend suggests that even though some motorists are driving more as gasoline prices drop, the sheer number of people losing jobs and no longer driving to work has reduced overall demand, said Peter Beutel, an oil analyst at Cameron Hanover.