oil heads back down towards 50

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    October 25, 2008

    Opec cuts output as oil heads back down towards $50 a barrel

    Oil prices could fall to $50 a barrel by the end of the year because of the global recession, reducing heating bills and the cost of motoring, analysts said yesterday.

    The price of Brent North Sea crude fell to $61 yesterday, the lowest level since March last year, even after the Organisation of Petroleum Exporting Countries (Opec) decided to cut output by 1.5 million barrels a day in an attempt to shore up prices.

    Supermarkets including Asda, Sainsbury’s, Tesco and Morrisons responded by announcing cheaper petrol.

    Robert Laughlin, an analyst at the trader MF Global, said: "The world-wide demand for energy is getting worse every day. If we continue to get this drip-drip of bad news, I think we will get close to $50 a barrel by December. We’ve seen demand [drop by] 2 million barrels per day since the beginning of August. This cut isn’t enough and Opec will definitely have to go further to stop the slide."

    Gordon Brown was said to be disappointed by Opec’s reduction in output and urged oil producers to show a responsible attitude. The United States, the world’s biggest consumer of oil, criticised the move, calling the cut an antimarket decision. The White House’s deputy press secretary said: "The high oil prices from the past year contributed to the slowdown in demand and the subsequent down-turn in the economy, and we would ask that everyone keep that in mind."

    Fears of recession have pulled oil down from a high of $147 a barrel in July. Analysts said that $50 a barrel was not an unreasonable price for oil, which traded within a range of $40 to $60 a barrel for most of 2007.

    However, some members of Opec, the group of 13 oil-producing nations, have budgeted for oil at $90 a barrel and were desperate to make a deeper production cut, in the hope of halting the plunge the markets have seen since the summer.

    In a statement, Opec said it had cut output because supply outpaced demand and prices had collapsed dramatically in recent weeks. Chakib Khelil, Opec’s president, rejected the suggestion that the decision would hurt the global economy. "There’s not going to be any impact on inflation, there’s not going to be any impact on growth," he said.

    Opec oil ministers said that they would review their decision at their next meeting in December. They left open the possibility of another emergency meeting before then if prices continue to fall.

    About a third of the production cut will be shouldered by Saudi Arabia, the biggest producer of oil in the cartel, which traditionally seeks to temper the most aggressive calls for cutbacks.

    While falling oil prices will be good news for the world’s oil consumers, including manufacturers, airlines and motorists, the slump in price means that some producer countries will be losing money with each barrel produced. Venezuela and Iran cannot produce oil profitably at current prices.

    Iran relies almost entirely on its oil exports for government revenue: for every dollar off the price of a barrel of oil, the country loses roughly $1 billion a year in revenue.

    Opec also made an appeal to Russia and other big oil exporters outside the cartel not to undercut its efforts to prop up prices and gave warning of tough times ahead for suppliers, as the fall in demand for oil is expected to deepen with a global recession.

    The latest weekly report from the US Department of Energy shows that demand for oil has fallen in 38 of the past 42 weeks. US demand is down nearly 10 per cent over the past four weeks, year on year.

    The British Exchequer will also see its revenues from North Sea oil hit hard by the plunging price of oil, at a time when it has had to spend £500 billion bailing out the banking system and its tax take is falling because of rising unemployment.

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