Oil Falls on Signs OPEC Cuts Won't Boost Prices as Demand Drops

By Mark Shenk

Dec. 23 (Bloomberg) -- Crude oil fell for a second day on speculation OPEC will be unable to boost prices as the global recession curbs demand faster than the group can cut production.

The Organization of Petroleum Exporting Countries is ``determined'' to stabilize oil markets, Saudi Oil Minister Ali al-Naimi told reporters in Doha, Qatar, Dec. 21. Japanese crude- oil imports tumbled 17 percent to 3.71 million barrels a day last month, according to a report from the country's finance ministry.

``The Japanese demand numbers help explain why OPEC is having such a hard time supporting prices,'' said Adam Sieminski, Deutsche Bank's chief energy economist, in Washington. ``Weak demand and increasing OPEC spare capacity are contributing to weaker prices.''

Crude oil for February delivery fell 25 cents, or 0.6 percent, to $39.66 a barrel at 10:19 a.m. Sydney time on the New York Mercantile Exchange. Prices have dropped 73 percent from a record $147.27 on July 11. Yesterday, futures lost $2.45, or 5.8 percent, to $39.91 a barrel.

All members of OPEC share the goal of stabilizing the oil market, Naimi told reporters at a conference in Doha. Kuwaiti Oil Minister Mohammed al-Olaim, speaking at the same conference, said he is ``confident'' of meeting production-quota cuts, adding that the oil price drop is caused by market conditions.

Oil and energy ministers from the six Gulf Cooperation Council countries met in the Qatari capital. Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates are also members of OPEC. The Gulf Cooperation Council's other two members are Oman and Bahrain.

South Korean Demand

One of Japan's Asian neighbors, South Korea, also saw demand decline. Consumption dropped 12.4 percent in November from a year earlier. The country used 60.3 million barrels of refined products, data from state-run Korea National Oil Corp. showed yesterday.

``OPEC may be determined to stabilize oil prices, but with such poor demand it's hard to see how any supply-driven initiatives can have a positive impact on prices,'' said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut.

Japan is the world's third-biggest oil importer after the U.S. and Germany, according to the U.S. Energy Department. South Korea is the fifth-biggest importer.

Falling demand for raw materials has hit most commodity markets. The Reuters/Jefferies CRB Index of 19 raw materials declined 1.6 percent to 215.35. The gauge lost 55 percent since reaching a record in July.

Brent crude oil for February settlement declined $2.55, or 5.8 percent, to settle at $41.45 a barrel on London's ICE Futures Europe exchange.

U.S. Inventories

U.S. supplies climbed in 11 of the past 12 weekly reports from the Energy Department as consumption dropped. Inventories probably rose 900,000 barrels last week, according to the median of analyst responses in a Bloomberg News survey. The department is scheduled to release its next report at 10:35 a.m. tomorrow in Washington.

``OPEC is trying its best to at least limit the damage caused by the supply overhang,'' said Bill O'Grady, chief markets strategist at Confluence Investment Management in St. Louis. ``Ali al-Naimi is making a lot of statements that would usually have a big impact on prices, but there's little they can do now.''

January futures, which expired last week, plunged 6.5 percent to $33.87 a barrel on Dec. 19, the lowest settlement for a contract closest to expiration since Feb. 10, 2004. Oil is down 27 percent in December.

Iraqi Bidding

Iraq said that international companies bidding for the country's oil resources haven't been deterred by the slump in crude prices or the lack of a national petroleum law. The country had the world's fourth-biggest oil reserves in 2007, according to U.S. Energy Department data.

Iraq's first licensing round since the U.S.-led invasion in 2003 is ``on course,'' and the country will proceed with another two rounds shortly, Oil Minister Hussain al-Shahristani said in a Dec. 19 television interview. Thirty-five companies are competing in the first round, due to be completed in June.

Bets that February oil will rise above $55 a barrel were the most-active options in electronic trading on the Nymex yesterday. February $55 call options fell 38 cents to 45 cents a barrel, or $450 a contract, on volume of 415 lots. One contract is for 1,000 barrels of oil.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.