Oil Trades Near Four-Year Low as OPEC Cut Seen as Insufficient

By Christian Schmollinger

Dec. 18 (Bloomberg) -- Crude oil traded near the lowest in more than four years on skepticism that OPEC’s larger-than- expected supply cut will be enough to boost prices as fuel demand drops.

Oil extended yesterday’s 8.1 percent decline after OPEC agreed that the group’s 11 members with quotas will trim current production by 2.46 million barrels a day to 24.845 million barrels a day. U.S. fuel consumption in November declined 7.4 percent from a year earlier to the lowest for the month since 1998, the American Petroleum Institute said yesterday.

“Worldwide demand for fuels is falling more than expectations,” said Ken Hasegawa, a commodity derivatives sales manager at Newedge Group in Japan. “The OPEC cut was much bigger than expected but it won’t be supportive for this market. This market can go down to $30.”

Crude oil for January delivery was at $40.08 a barrel, up 2 cents, at 10:34 a.m. Singapore time on the New York Mercantile Exchange. The contract earlier fell as much as 87 cents, or 2.2 percent, to $39.19 a barrel, the lowest since July 13, 2004.

The January contract expires tomorrow. The more active February contract was at $44.90 a barrel, up 29 cents.

Prices have tumbled 73 percent from a record $147.27 on July 11. Yesterday, futures declined $3.54 to $40.06 a barrel.

“OPEC will be seen as having done the sensible thing,” said Tony Regan, a Singapore-based independent oil and gas consultant in an interview on Bloomberg Television. “However, they are the supply-side equation and no one is looking at the supply side. People are more focused on declining demand.”

The Organization of Petroleum Exporting Countries’s cut, agreed to yesterday at a meeting in Oran, Algeria, is larger than a 2 million-barrel reduction indicated Dec. 16 by Saudi Arabian Oil Minister Ali al-Naimi.

OPEC Compliance

OPEC’s rate of compliance with a previous output cut is more than 85 percent, al-Naimi told reporters yesterday before the ministerial meeting that decided production targets. Analysts and traders are skeptical of the ability of the group to enact the output reduction.

“I don’t think OPEC can keep this production cut at the level they decided,” said Newedge’s Hasegawa. “They have to make money. Cheating will begin and the market knows that.”

The group will next meet on March 15 in Vienna and has chosen Angolan Oil Minister Jose Maris Botelho de Vasconcelos as its president for 2009.

Brent crude oil for February settlement was at $45.66 a barrel, up 13 cents, at 10:32 a.m. Singapore time on London’s ICE Futures Europe exchange.

Oil also dropped after the U.S. government said supplies climbed for the 11th time in 12 weeks.

Inventories rose 525,000 barrels to 321.3 million barrels last week, the U.S. Energy Department said yesterday in a weekly report. Supplies have climbed 11 percent since Sept. 19.

U.S. gasoline inventories gained 1.3 million barrels to 204 million barrels in the week ended Dec. 12, the Energy Department report showed. Supplies of distillate fuel, a category that includes heating oil and diesel, climbed 2.94 million barrels to 133.5 million barrels, the highest since November 2007.

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