Crude Oil Falls as OPEC Cut May Be Insufficient as Demand Drops

By Christian Schmollinger

Oct. 24 (Bloomberg) -- Crude oil fell on speculation a potential OPEC output cut will fail to stave off price declines as global economic growth slows and fuel demand wanes.

OPEC is expected to slash at least 1 million barrels a day of production when it meets today in Vienna, according to a Bloomberg News survey. Iran's Oil Minister Gholamhossein Nozari said yesterday a 2 million barrel-a-day reduction was needed. U.S. fuel demand fell 8.5 percent from a year ago, the Energy Department said Oct. 22.

``Anything less than 2 million barrels and we're headed lower,'' said Mark Waggoner, president of Excel Futures Inc. in Irvine, California, in an interview with Bloomberg Television. ``The markets are going to go down from here to $58.''

Oil for December delivery dropped as much as 96 cents, or 1.4 percent, to $66.88 a barrel on the New York Mercantile Exchange and was at $67.06 a barrel at 2:49 p.m. Singapore time.

It earlier rose as much as $1.66, or 2.5 percent, to $69.50 a barrel. Prices are down 23 percent from a year ago and 6.5 percent this week, heading for its fourth straight weekly decline. That's the longest losing streak since January 2007.

Brent crude oil for December settlement fell as much as 94 cents, or 1.4 percent, to $64.98 a barrel on London's ICE Futures Europe exchange. It was at $65.45 a barrel at 2:51 p.m. Singapore time. It earlier rose as much as $1.41, or 2.1 percent, to $67.33 a barrel.

Oil has dropped from the record $147.27 a barrel in New York on July 11 as slowing economic growth curbs demand.

China, the world's fastest-growing energy consumer, said Oct. 20 its economy expanded at 9 percent in the third quarter, the slowest pace in five years. Concern a deepening global slump will damp profits has pushed the MSCI World Index 4 percent lower this week.

OPEC Cuts

Prices dipped during trading yesterday after Saudi Arabian Oil Minister Ali al-Naimi declined to express his support for a possible cut, on his arrival in Vienna. Saudi Arabia and Iran are the Organization of Petroleum Exporting Countries' two biggest producers.

``Who said anything about a cut?'' al-Naimi said. ``Prices will be determined by the market.''

OPEC should cut production by 2 million barrels a day to stem the slump in prices and ``balance'' the market, Iranian Oil Minister Gholamhossein Nozari said earlier yesterday.

``The Saudis have to commit to cutting back,'' said Excel's Waggoner. ``Most of OPEC will not want to cut back because they need the revenue coming in. If the Saudis say they will cut 1 million barrels a day and expect everyone else to cut another million barrels, that might be doable.''

Meeting Today

OPEC leaders are scheduled to meet in Vienna today at 9 a.m. local time. The OPEC price basket, an average of 11 crude grades sold by the group, was at $60.82 a barrel, the lowest since March 2007.

The last time OPEC lowered quotas was at a December 2006 meeting in Abuja, Nigeria. The 500,000 barrel-a-day cut took effect in February 2007, expanding an earlier reduction reached in October. The cuts were reversed later in 2007 as prices rose.

Crude oil's historical volatility for the past 30 days climbed to 94 percent this week. Prices fell 10 percent from the start of the week to Oct. 22 and have risen 3.3 percent since.

``There are so many unknowns at the moment that from day to day the market seems to be focusing on different things,'' said Toby Hassall, an analyst at Commodity Warrants Australia. ``There was a strong rally in the U.S. dollar and the OPEC meeting has thrown some spice into the mix as well.''

Oil has lost its appeal among investors as a hedge against inflation, along with other commodities, as the U.S. dollar advances. The euro has fallen 20 percent versus the dollar since July 15. The dollar traded at $1.275 per euro after reaching $1.2728, the strongest level since November 2006.

``Oil is priced in U.S. dollars, so as the dollar becomes more expensive, demand is going to be affected,'' Hassall said.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.