Price of oil drops despite OPEC production cuts

| Friday, December 10, 2004

Crude oil prices fell to the lowest point in nearly five months Friday, Dec. 10, despite an OPEC agreement to cut production back to target production levels early next year – a move that would take about 1 million barrels a day off the market.

After an initial knee-jerk move higher, light sweet crude for delivery in January dove $2.18 to $40.35 a barrel in afternoon trade on the New York Mercantile Exchange. The price is the lowest it has been since July.

“It takes a while for any agreement to take effect and they are notorious for their lack of adherence to quotas,” said Jason Schenker, an economist at Wachovia Corp., told Bloomberg News. “This alone will not be enough to send prices back up to the recent highs.”

OPEC, meeting Friday in Cairo, Egypt, still must officially approve the decision to reduce output to target production levels. But delegates said that consent was just a formality.

If implemented and followed, the reduction would scale back the cartel’s overall production to the group’s current official ceiling of 27 million barrels a day – a figure the cartel has been exceeding by more than 1 million barrels a day. The move is aimed at staving off further declines in the world price without triggering a new buying frenzy.

Kuwait’s Sheik Ahmad Fahad Al-Ahmad Al-Sabah said all OPEC members were committed to full compliance with the current total production ceiling of 27 million barrels a day and taking excess oil off the market.

Crude prices are about $15 cheaper per barrel than the record of $55.17 set in October.