Oil sinks to 4 1/2-year low after OPEC cut

Oil falls even as cartel says it will cut production in bid to prop up prices driven lower by global economic downturn.

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By Kenneth Musante, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The Organization of Petroleum Exporting Countries, in a bold but not unexpected move to prop up falling oil prices, said Wednesday that it would cut production by 2.2 million barrels a day starting next month. The cut is the largest ever announced by OPEC.

OPEC hopes the cuts will stabilize prices, which have dropped by more than $100 a barrel since reaching a record high in July. The worsening economic downturn has sapped demand worldwide.

But traders were unmoved by the production cut, which had been widely expected. U.S. crude for January delivery sank $3.54 to settle at $40.06 a barrel on the New York Mercantile Exchange.

That's the lowest settlement price since July 13, 2004, when oil settled at $39.44.

After the OPEC announcement, prices fell $2.10 to $41.50 a barrel. Oil had been as high as $45.50 earlier in the day.

Oil prices have fallen rapidly in recent months due to "the repercussions of the financial crisis," said OPEC President Chakib Khelil. "We are in a very deteriorating environment," he said.

"This move by OPEC was well telegraphed by the market," said Phil Flynn, senior market analyst with Alaron Trading in Chicago.

Before the meeting, Saudi Arabia's Oil Minister told reporters that the group would cut 2 million barrels a day.

The new cut comes on top of a recent decrease of 2 million barrels a day announced earlier, bringing production down a total of 4.2 million barrels per day from September levels.

With the cuts, OPEC nations will produce roughly 24.8 million barrels a day.

Khelil said the cartel hopes oil will stabilize between "$70 to $80 at least."

If oil fails to stabilize, Khelil left the door open for more cuts. "If you are not surprised [by the cuts], then we have to do something about it," he said.

The group is next scheduled to meet on March 15, but Khelil said member states were prepared to hold another meeting sooner if needed.

The nations in OPEC produce about 40% of the world's oil. The group met Wednesday in Oran, Algeria.

Non-OPEC fizzle: There had also been rumors early Wednesday that some non-OPEC countries would follow an OPEC cut with cuts of their own. But non-OPEC cuts failed to materialize.

"People really wanted to see a couple of non-OPEC producers step up to the plate, particularly Russia," said Tom Orr, head of research for brokerage Weeden & Co.

Top officials from Russia and Azerbaijan hinted that they may cut production with OPEC, according to reports, but no non-OPEC cuts were announced as the session progressed.

"They (Russia) haven't agreed to anything with us," said Khelil. As a separate nation, "they'll have to make their own decision," he added.

U.S. inventories: Meanwhile, the U.S. Energy Information Agency reported Wednesday that crude oil inventories increased 500,000 barrels from the previous week.

Analysts had expected to see a decline of 900,000 barrels of crude, according to a survey from research firm Platts.

Total gasoline inventories increased by 1.3 million barrels and are near the lower boundary of the average range. Supplies of distillates, which are used to make diesel and home heating oil, increased by 2.9 million barrels.

Analysts had expected a rise of 1.5 million barrels of gasoline, and a 1.8 million drop in distillates.

Economy and demand: As the global economy has slowed, the price of oil has plunged - nearly 70% since hitting a record high of $147.27 a barrel in mid-July. Investors are worried that worldwide slowdowns have tamped down demand for petroleum-based fuels.

In the United States, the world's largest oil consumer, driving has dropped off significantly over the past year, according to the Transportation Department.

Oil prices tumbled on Tuesday after the Federal Reserve lowered its key interbank interest rate to between 0% and 0.25% in an effort to jump-start the economy.

"These aggressive moves that have to be taken by the Fed are really not good for oil right now," said Flynn.

CNN Wires contributed to this report. To top of page

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