18 Dec 2008

Oil price falls despite record OPEC supply cut

5:40 pm on 18 December 2008

OPEC oil ministers have agreed to cut 2.2 million barrels per day from oil markets, the organistion's deepest ever reduction, in a race to balance supply with rapidly crumbling demand for fuel.

The 12 members of the Organisation of the Petroleum Exporting Countries were also aiming to build a floor under prices that have dropped more than $US100 from a July peak above $US147 a barrel.

The cut, effective from 1 January, is in addition to existing reductions of 2 million barrels per day agreed by OPEC at its last two meetings.

The decision at the organisation's meeting in Algeria lowers the group's supply target to 24.845 million barrels per day.

However, oil prices dropped to their lowest in more than four years on fears the record supply cut may fail to fully offset slumping world energy demand.

US crude oil prices fell $US3.54 to settle at $US40.06 a barrel after dipping below $US40 for first time since July 2004.

Weekly US data showed inventories in the world's biggest consumer continued to swell.

A deepening recession has battered world demand and fuel inventories are bulging worldwide. Prices already have plunged by two-thirds since the summer and analysts say the oil market is under the sway of world financial turmoil.

The cut, the third this year, brings a total reduction in OPEC supply to 4.2 million bpd, nearly a 5% cut in world oil supplies. OPEC is due to meet again on 15 March.

OPEC president Chakib Khelil said the group would do its utmost to ensure new restraints were strictly enforced.