Crude oil tumbled to its lowest level in nearly four and a half years on Wednesday as an OPEC production cut failed to boost the bearish market sentiment over slumping demand.
Light, sweet crude for January delivery slid US$3.54 to settle at US$40.06 a barrel on the New York Mercantile Exchange. Price fell to as low as US$39.88 a barrel during the session, which is the first time for oil to drop below US$40 since July 2004.
OPEC, which accounts for 40 percent of the world oil supply, announced on Wednesday an output cut of 4.2 million a barrel per day from its September production level. Given OPEC's previous cuts over the recent months, the oil cartel is actually slashing another 2.2 million barrels per day starting Jan. 1, 2009.
The cut failed to boost crude futures as investors already cashed the amount in the price before the announcement. Many analysts predicted the oil cartel would have to slash 2 to 3 million barrels per day to deliver a "surprise," as forecast by OPEC President Chakib Khelil earlier this month, to the market.
Oil has shed more than 70 percent from its July peak of US$147 a barrel, as world energy demand continued to weaken with major economies including the United States, Euro zone, Britain and Japan officially in recession.
Harry Tchilinguirian, a senior oil market analyst at BNP Paribas, wrote in a note to press that a large cut was necessary for OPEC to catch the market's attention, but "in a market focused on demand and the economy, a too-large a cut, aiming for much higher could turn sentiment further negative on the economy and ultimately backfire."
"We will wait to see, but today's price action does not bode well," Tchilinguirian said.
The market also doubts OPEC's compliance in production cut. The organization deferred the decision on output cut when it met in Cario last month, saying it would use the time to observe the impact of its 1.5-million barrel reduction in October. Many observers believe that as little as 60 percent of the total cut was fulfilled, with key player Saudi Arabia acting accordingly while Ecuador still pumping at the same level.
"Seeking to establish a price floor would have been a more reasonable course of action," Tchilinguirian commented.
OPEC's next official meeting is scheduled for March 15 in Vienna.
Oil's Wednesday fall also came amid worrying data showing another buildup in U.S. fuel inventories and drop in demand. The U.S. Energy Department reported that last week the crude inventory increased roughly 0.5 million barrels while the gasoline supply added 1.4 million barrels.
The report also revealed that in the past four weeks, U.S. fuel demand averaged 19.6 million barrels a day, 4.9 percent down from the same period last year. The gasoline demand contracted 2.7 percent and the distillate demand was 4.5 percent, according to the report.
In London, Brent crude for February delivery fell US$1.12 to settle at US$45.53 a barrel on the ICE Futures Exchange.
(Xinhua News Agency December 18, 2008)