Oil prices fall below $65 despite OPEC's production cut; gas drops
VIENNA -- An OPEC attempt to stem the free-fall in oil prices fizzled Friday with crude futures dropping below $65 a barrel to lows last seen 15 months ago on world economic fears, despite the 13-member group's decision to slash production by a daily 1.5 million barrels.
Oil's steep plunge has sent the price of a gallon of gasoline below year-ago levels for the first time in 2008.
A gallon of regular gas fell 4 cents overnight to a new national average of $2.78, according to auto club AAA, the Oil Price Information Service and Wright Express. That's nearly a dollar less than what was paid last month and 4 cents below gas prices one year ago on Oct. 24.
Gas prices are off from their July peak by about a third compared with the price of crude, which has been more than halved.
There is a lag between the two prices as oil being traded now will not be delivered until next month. That oil must be refined, or turned into gasoline, and then shipped to filling stations.
Oil's imperviousness to production cutbacks — the most potent weapon in the OPEC arsenal — reflected the cartel's diminishing control over prices. And the language of an OPEC statement announcing the cut reflected how seriously it viewed the erosion of its revenues, as did the unusually short deliberations leading to the decision.
"Oil prices have witnessed a dramatic collapse — unprecedented in speed and magnitude," said the 13-nation organization. "This slowdown in demand is serving to exacerbate the situation in a market which has been oversupplied with crude for some time."
It also warned of further hard times ahead for suppliers, saying "the fall in demand will deepen" in the coming months.
In more orderly economic times, any Organization of Petroleum Exporting Countries move to reduce output led to an upward spike on fears that demand would outstrip supply. But Friday's oil market reaction reflected present realities; with the financial vortex sucking the U.S. and other major consumers into recession — and even China's and India's booming economies slowing — even less oil at lower prices will have trouble finding a buyer.
"The power to influence oil prices is moving farther and farther away from OPEC," said oil trader and analyst Stephen Schork. "Everyone thought China and India would go on buying oil forever, but that's not the case.
"The demand is no longer there," said Schork. "I think people fooled themselves when they said emerging markets could weather a U.S. downturn. That's yanked OPEC right out of its role as the key player."
Steeply dropping world stock markets that reflected fear of a global recession proved the dominant influence on oil markets, sidelining any OPEC hopes that its steepest output cut in five years would remedy crude's plunge.
Major European bourses that were down more than 10% during the day improved by closing time but still suffered losses as high as 5%. Asian stocks also closed sharply down. Russia's two exchanges were shut down early because of double-digit losses and officials said they wouldn't resume trading until Tuesday.
On Wall Street, the Dow Jones industrials were down sharply also.
Benchmark crude futures were trading at $64.60 a barrel on the New York Mercantile Exchange after falling as low as US$62.85 earlier in the day, shortly after OPEC announced its cut, to take effect starting next month.
Crude prices have now fallen 56% from the highs reached in July, and more than $41 per barrel in just the last 30 days.
Reflecting the huge demand slump facing OPEC, a U.S. Department of Transportation report released Friday showed the largest monthly decline in miles driven in 66 years.
Americans drove 5.6% less, or 15 billion fewer miles, in August 2008 compared with August 2007 — the biggest single monthly decline since the data was first collected regularly in 1942.
In terms of overall use, the latest weekly report from the U.S. Department of Energy shows that crude demand has fallen in 38 of the past 42 weeks. U.S. demand is down nearly 10% during the past four weeks year on year.
The figures are significant because the U.S. still consumes one out of every four barrels of oil produced.
The 11 OPEC nations under quotas are already producing more than their allotments — overall output from them is about 300,000 barrels a day past the stated OPEC daily target of about 29 million barrels.
So if they stop overproduction, and comply with the 1.5-million cut agreed on Friday, OPEC should end up producing about 1.8 million barrels less a day.
But against increasingly alarming economic developments not only in America but in most corners of the world, even an OPEC cut closer to 2 million barrels a day is unlikely to turn near-term prices around.
The cut reflected a compromise between OPEC members such as Iran and Venezuela, which were looking to yank up to 2 million barrels a day off the market, and oil powerhouse Saudi Arabia and its Gulf allies that are more open to U.S. appeals for plentiful crude on the market.
It also tried to balance OPEC members' concerns over eroding revenue with demands from the U.S. and other major consumers for affordable crude.
But the U.S. criticized the move.
"It has always been our view that the value of commodities, including oil, should be determined in open, competitive markets, and not by these kinds of anti-market production decisions," deputy press secretary Tony Fratto said Friday. "The high oil prices from the past year contributed to the slowdown in demand and the subsequent downturn in the economy, and we would ask that everyone keep that in mind going forward."
Still, OPEC officials left no doubt that they were ready to slice deeper quickly if Friday's decision does not end the price free fall.
Friday's meeting was called unexpectedly in response to prices that have entered a tailspin since their historic high of nearly $150 in July. OPEC President Chakib Khelil said OPEC was ready to convene another emergency session before its next planned gathering in December in Algeria "if there are further decisions that have to be made" on slashing prices.
"It's clear that the ministers are attempting to underpin at $60 a barrel," said James R. Crawford an analyst with Inter Emirates. "But where the market will settle remains open."
In an appeal to Russia and other major oil exporters outside OPEC, the oil ministers meeting in Vienna indirectly urged them not to undercut their efforts to prop up prices.
"OPEC cannot be expected to bear alone the burden of restoring equilibrium," said the statement.
OPEC Secretary-General Abdullah El-Badri said before a meeting with Russian President Dmitry Medvedev on Wednesday that he would not ask Russia for oil production cuts as global prices fall. Some analysts have said Russia was unlikely to agree to production cuts, given that it already is battling with falling output as West Siberian oil fields mature.
But others spoke of behind-the-scenes negotiations between Russia and OPEC on the issue.
El-Badri took pains Friday to emphasize that OPEC's move was predicated by a need not to raise prices but to put a floor underneath them. Iran, Venezuela and other OPEC members have suggested that, for them, selling oil under US$80 was a loss-maker, and Iraq said Thursday it would have to rethink next year's national budget if prices remain under that level.
El-Badri said OPEC could not be expected to solve the world's financial crisis — something the organization did not cause and could not cure.
"OPEC cannot bail out the problems of others," he said.
Contributing: Associated Press