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By Samuel R. Avro on Dec 17, 2008 with no responses

Crude Oil Prices Plummet Despite OPEC Supply Cut

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Oil prices dropped on Wednesday after the record production cut announced by the Organization of the Petroleum Exporting Countries (OPEC) was believed to be not enough to keep pace with falling demand.

Although the 2.46 million barrel per day cut was greater than expected, commodities traders didn’t take much notice. Instead, they chose to focus on the report released by the Energy Information Administration (EIA) which showed that supply was still high as demand continues to slide.

The EIA said that U.S. commercial crude oil inventories increased 0.5 million barrels for the week ended Dec. 12, compared to the previous week. Total motor gasoline inventories increased by 1.3 million barrels, compared to the 1.0 million barrel rise expected by analysts.

Analysts has expected a much smaller rise in inventories.

U.S. light, sweet crude fell $3.54, or 8.12 percent, to settle at $40.06 a barrel, dipping to a more than four year low. Prices dipped below $40 at one point during trading on the New York Mercantile Exchange.

The White House called OPEC’s decision to cut production ”short-sighted” and said the oil cartel has an obligation to keep the market well-supplied.

“The fall in oil prices in recent months has benefited the economy at a difficult time and helped hard-pressed consumers,” U.K. Energy Minister Mike O’Brien said in a statement after OPEC’s announcement.

The cut comes on top of existing reductions of 2 million barrels per day agreed by OPEC at its last two meetings. However, OPEC member nations don’t always heed to their designated quotas. Last month, an OPEC report revealed that they produced more than 600,000 barrels above their November quota.

“The purpose of the cut is to bring the market into balance and avoid the gyrations of the price,” said Ali al-Naimi, Saudi Arabia’s oil minister. “The cut may lead to higher prices or may not.”

Saudi Arabia has publicly stated that their target price of $75 is a ‘fair’ price for crude oil. So much so, that they even consider it a ‘noble cause’ to prop up the prices to that point.

“You must understand the purpose of the $75 price is for a much more noble cause,” the Saudi Oil Minister said. “You need every producer to produce and marginal producers cannot produce at $40 a barrel,” the minister said.

Oil magnate, T. Boone Pickens, who is advocating for Americans to reduce their dependence on foreign oil, released a statement after the latest OPEC supply cut.

“This is in line with what I predicted would happen last week. OPEC’s decision will likely lead to an increase in oil and gas prices in America and proves the point that we must reduce our dependence on foreign oil,” the founder of the Pickens Plan said.

He also said that it’s understandable why OPEC is propping up the prices of a commodity they own, but that Americans should be more intent on preventing the price from being controlled by interests that aren’t aligned with those of the U.S.

“We have the domestic resources in wind, solar and natural gas to get the job done on energy and transportation, so let’s use them,”said Pickens.

OPEC wants non-member nations, such as Russia and Mexico, to cut production on their own too.