Oil drops to 15-month low

Oil prices continued their retreat today, falling below US$70 a barrel for the second time in a week to a 15-month low despite widespread expectations that Opec will dramatically cut output at its emergency meeting in Vienna on Friday. Concerns about shrinking oil demand in the global economic crisis outweighed the expected cut in supply, analysts said. The price of West Texas Intermediate crude for December delivery fell $4.31 to $67.87 and briefly touched $67.75, its lowest level since June last year. To the chagrin of big producers who had pinned their economic development plans on high prices, the market had already factored in the effect of an Opec output cut, said Robin Mills, a Dubai-based oil analyst. "The market is pricing in the probability that there will be a production cut," Mr Mills said. "I don't think anyone has control of the markets right now. They're battling some very negative sentiment." As prices creep downwards towards producers' budget targets, few doubt Opec will move to defend prices by reducing output quotas by as much as 2.5 million barrels per day (bpd). Libya's top oil official, Shokri Ghanem, told Bloomberg that the market was "flooded and oversupplied", and said a cut of one million bpd would be insufficient. Oil ministers from most of the group's member states, including Qatar, Libya, Iran, Algeria, Nigeria and Venezuela, have indicated some form of production cut is all but inevitable. The question, however, is whether a decision to curb output will have its intended effect, said Dalton Garis, an associate professor of economics and market behaviour at the Petroleum Institute in Abu Dhabi. "They're not paying any attention to Opec at all," Prof Garis said of traders. "I think they're really looking at demand more than supply." The US is already using two million barrels less oil every day compared with this time last year, and forecasts for growth in world demand continue to be revised downwards each month. Even a production cut of two million bpd would merely make up for the fall in US demand, Prof Garis said. Efforts to boost prices by slashing output could also be hindered by Russia, the world's largest producer, which indicated yesterday that it would not join Opec in reducing production. With demand for oil shrinking in the West, all eyes are on demand data from China, which announced on Monday that economic growth slowed to nine per cent in the third quarter, down from 10.1 per cent three months before. But economists are unsure how closely oil demand in the country will follow an economic slowdown. "So far we haven't seen convincing data of a big drop in Chinese demand," Mr Mills said. And the markets do not have a clear picture of whether lower crude prices will induce the Chinese government to reduce its petrol subsidies, a move that would have a big effect on Chinese oil demand. The government could see lower crude prices as an optimal moment to expose consumers to market prices for fuel, or it could take the opposite view and see subsidies as more affordable with lower oil prices, Mr Mills said. Oil's rapid fall has already begun to take a toll on producers. Nigerian officials have lowered the oil price forecast in their budget from $62.50 to $45. Yesterday, Odein Ajumogobia, the oil minister, told Reuters that he would be happy with oil at $80 a barrel. "Nigeria would be comfortable to have the oil price at $80 in view of the production cost and in view of the fact that Nigeria is looking for more money to finance its budget," he said. Barham Salih, the deputy prime minister of Iraq, told Reuters that the country would have to amend next year's budget, which had been based on a price forecast of $80 a barrel. The $78.7 billion budget still has to be approved by parliament. "While we will be using the surplus from this year, we may have to reduce planned allocations," Mr Salih said. Yesterday, EFG Hermes predicted that Kuwait's gross domestic product growth would slow to 3.1 per cent next year from 5.7 per cent as a result of lower oil prices. * with agencies cstanton@thenational.ae