Oil prices fall to 11-month low amid skepticism about OPEC's resolve to cut production
Friday, October 20th 2006, 10:59 am
By: News On 6
NEW YORK (AP) _ When OPEC speaks, energy traders listen. They just don't necessarily believe what they hear.
Oil prices fell to an 11-month low below $57 a barrel on Friday in a sign of the market's doubts about OPEC's willingness to carry out a 4 percent production cut.
The pledge to curb output by 1.2 million barrels a day, announced after an emergency meeting in Doha, Qatar, came after oil prices had fallen by roughly $20 since a mid-July peak above $78 a barrel. Some oil-cartel members warned output could be trimmed further when the group meets in December.
But many analysts believe the Organization of Petroleum Exporting Countries will have difficulty enforcing the production cut in its entirety because oil prices are still twice as high as they were just three years ago.
``It's clear there will be some production cutbacks. But is it going to be 1.2 million barrels? That's probably unlikely,'' said Andrew Lebow, a broker at Man Financial.
OPEC has a history of ``cheating,'' or producing above its official quota, when prices are high and analysts are therefore reluctant to accept the cartel's intentions at face value.
Moreover, many analysts see OPEC's action as proof that the group responsible for supplying more than a third of the world's oil is increasingly worried about slowing demand growth and burgeoning supplies from non-OPEC sources.
``What brought us to this point _ where OPEC needs to reduce production by 1 million barrels a day _ is bearish for prices,'' James Cordier, president of Liberty Trading in Tampa, Fla. ``The fact is, demand has fallen or is about to fall more and OPEC is trying to catch this by producing less.''
Light sweet crude for November delivery on the New York Mercantile Exchange fell $1.68 to settle at $56.82 a barrel. The last time front-month futures settled below $57 was Nov. 29, 2005.
In London, Brent crude for December delivery on the ICE Futures exchange settled at $59.68 a barrel, a decline of $1.19.
Oil prices have tumbled since summer due to rising global supplies, a weaker-than-anticipated hurricane season and expectations for slower economic growth. The OPEC production cut is intended to halt the decline.
``The question now is whether OPEC members will comply with the new quotas or whether history will repeat itself and OPEC members over-produce,'' Global Insight analyst Simon Wardell said in a research note. ``The markets appear to be betting on the latter.''
United Arab Emirates Oil Minister Mohammed bin Dhaen al-Hamili said the reductions will come from actual production levels, which are believed to be about 29.5 million barrels of oil per day.
The official OPEC quota, which does not include Iraq's estimated output of 2 million barrels a day, is 28 million barrels a day.
OPEC's announced cut was the first since December 2004, when oil traded slightly above $40 a barrel. It will take effect Nov. 1, just as global oil demand should begin to rise as winter approaches in the Northern Hemisphere.
The move comes at the ``worst time,'' said Claude Mandil, head of the International Energy Agency.
Saudi Arabia, the world's largest producer, is set to reduce output by 380,000 barrels a day, while Iran will cut by 176,000 barrels a day and Venezuela will trim 138,000 barrels a day, analysts said.
Wardell said the market should expect an actual cut of about 800,000 barrels a day and that ``this will help to solidify prices.''
However, if the Northern Hemisphere winter is mild, energy prices could fall further, analysts said. Domestic inventories of heating oil and natural gas are well above historical averages for this time of year.