OPEC Faces Worsening Oil Price Drop as Growth Slips

By Margot Habiby and Grant Smith

Oct. 23 (Bloomberg) -- OPEC's first production cut in almost two years may fail to stanch a collapse in oil prices as roiling stock markets signal that the financial crisis has spread to emerging markets, the center of demand growth.

The Organization of Petroleum Exporting Countries will likely slice output by at least 1 million barrels tomorrow at a meeting in Vienna. It may not be enough. Morgan Stanley warned that global demand may fall this quarter, normally the peak period for oil consumption.

``The correlation between OPEC supply cuts and price increases is near zero,'' said Ben Dell, an analyst at Sanford C. Bernstein & Co. in New York ``All a cut does is reaffirm we're oversupplied and demand is weakening. Developed economies are already negative and emerging markets are slowing.''

Crude oil for December delivery closed at a 16-month low of $66.75 a barrel in New York yesterday as Argentina's seizure of pension funds rattled markets around the world. It was up $1.19, or 1.8 percent, to $67.94 a barrel at 12 p.m. London time after Iranian Oil Minister Gholamhossein Nozari said OPEC should cut production by 2 million barrels a day.

An oil price between $60 and $90 a barrel won't worsen the global economic slowdown, said OPEC President Chekib Khelil, the Algerian oil minister.

Options trading shows crude prices are likely to extend their slide and may trade below $55 in December, Merrill Lynch & Co. said this week. Oil has fallen 54 percent from a July 11 record of $147.27.

Stocks Slump

Asian stocks slumped today, driving the region's benchmark index to the lowest level in four years, as Japanese exports missed estimates, commodities prices tumbled and South Korea's worst financial crisis in a decade deepened.

Argentina's main stock index had its biggest three-day loss in 18 years yesterday, on concern the government seizure of $29 billion of private pension funds will further undermine investor confidence in South America's second-biggest economy and cause its second default in a decade.

Earlier this week, China, the world's fastest growing energy consumer, said its economy grew at 9 percent in the third quarter, the slowest pace in five years. Demand from emerging markets, led by China, helped drive prices close to $150 a barrel this year. Chinese oil imports rose 11 percent last year and 13 percent in the first half of 2008, according to customs data.

Chinese Slowdown

The Centre for Global Energy Studies, founded by former Saudi Arabian Oil Minister Ahmad Yamani, doubled the likelihood of a slowdown in Asian economies to 20 percent in an Oct. 20 monthly report.

``Chinese demand has been setting up for a major decline,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc.

India's central bank unexpectedly lowered its key repurchase rate on Oct. 20 for the first time since 2004 in a signal that Governor Duvvuri Subbarao sees weaker growth as a bigger threat than inflation in Asia's third-largest economy.

South Korea, Asia's fourth biggest economy, reined in crude oil imports last month, to 69 million barrels last month from 70.3 million in August.

Demand Dip

World oil demand is expected to fall to as low as 83.5 million barrels a day in the second quarter of 2009, from 85.7 million barrels a day last quarter, a Morgan Stanley consultant said yesterday.

``We are going to see a significant dip in demand that will be most severe in the second quarter,'' Sadad Al-Husseini, a Morgan Stanley consultant and former head of exploration and production at Saudi Aramco, said on a conference call.

The price of Saudi Arabia's Arab Medium and Arab Heavy crude oils for shipment to the U.S. dropped below $60 a barrel for the first time yesterday, when priced against U.S. benchmark West Texas Intermediate oil, according to Bloomberg data. Arab Medium fell to $59.26 and Arab Heavy to $57.01.

Fuel demand in the U.S. averaged about 18.7 million barrels a day during the four weeks ended Oct. 17, down 8.5 percent from the same period a year earlier, according to the Energy Department.

Market `Flooded'

OPEC will ``most probably'' decide to cut production, Algerian Oil Minister and OPEC President Chakib Khelil said today in Vienna. Members are struggling to sell crude amid high global inventories, he said.

The oil market is ``flooded'' with crude and an output cut of 1 million barrels a day won't be sufficient, Shokri Ghanem, Libya's top oil official said yesterday.

The last time OPEC decided to slash 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 agreed in October. The cuts were reversed later in 2007 as oil kept rallying.

``OPEC will be torn between wanting to lower output to shore up prices and, at a time when the global economy is getting into a recession, knowing that if they push up oil they will make the recession worse,'' Deutsche Bank AG's Chief Energy Economist Adam Sieminski said from New York. ``We predict the price could fall further, to $50 a barrel by 2010.''

Eleven years ago, OPEC members bickered about output quotas as oil slid 28 percent in 10 months amid the onset of the Asian financial crisis. At a meeting in Jakarta in November 1997, they raised quotas, ignoring the turmoil that slowed Asian economies and cut oil demand. Prices fell another 44 percent by December 1998 to below $11 a barrel. New York oil traded near $68 today.

IEA Forecast

To be sure, International Energy Agency Director Nobuo Tanaka said his organization has yet to see any decline in emerging markets oil demand and predicts 5.2 percent growth in Chinese oil demand next year.

``Our statistics clearly tell us there is not yet any indication of slowdown in China, India or the Middle East,'' Tanaka said in an interview yesterday. ``Their demand is still very robust.''

To contact the reporter on this story: Margot Habiby in Vienna at mhabiby@bloomberg.net; Grant Smith in Vienna at gsmith52@bloomberg.net.