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Oil Prices Drop to 20-Month Low

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The new york times


Oil prices fell to their lowest level in 20 months on Tuesday, despite efforts by the OPEC cartel to stem the slide, as weak economic growth continued to reduce consumption around the world.


Lower energy prices are providing some welcome relief for struggling consumers, but a 59 percent decline in oil prices since their summer peak also shows how radically the prospects of the global economy have darkened in recent months.


At an emergency meeting last month, members of the Organization of the Petroleum Exporting Countries agreed to reduce their output, as of Nov. 1, to slow the price slide.


While there is no official tally of OPEC production, several members — including Algeria, Qatar, the United Arab Emirates and Kuwait — have signaled in recent days that they had begun paring their production.


Various reports also suggested that Saudi Arabia, the cartel’s kingpin, had warned some Asian customers that it would pare exports by 5 percent next month.


So far, OPEC producers have announced cuts totaling about 1.1 million barrels a day, less than the 1.5 million barrels a day that the cartel agreed to last month. According to estimates by PFC Energy, a consulting firm, however, producers have actually trimmed their production by only about 800,000 barrels a day.


Despite these efforts, slower consumption has continued to weigh on oil markets, pushing prices down on Tuesday to their lowest level since March 2007.


Crude oil futures on the New York Mercantile Exchange settled at $59.33 a barrel, down 5 percent. Prices have plummeted since hitting a peak of $145.29 a barrel in July.


Producers face the difficult task of seeking to balance oil supplies with slowing demand during one of the worst economic slowdowns in recent memory.


The International Monetary Fund recently warned that the world faced the prospect of a simultaneous recession in the United States, Europe and Japan for the first time in more than 60 years. The Chinese economy, long the main engine of growth in oil demand, is also slowing.


As a result, a growing number of oil specialists now expect global demand to drop this year, which would be the first annual decline since 1983.


“In a falling demand environment, it is extremely difficult to stem a price drop,” said Francisco Blanch, a commodity strategist at Merrill Lynch. “Global economic growth is still trending down and it will be a few quarters before we see a trough for oil prices. Until then, OPEC will try to figure out what the right level of production is going to be. That’s a hard thing to do.”


After gasoline prices soared above $4 a gallon earlier this year, oil demand in the United States dropped over the summer. Consumption fell by 1.8 million barrels a day, or 8 percent, to 19.3 million barrels a day in August, compared with the same period a year ago, according to the latest monthly estimates from the Energy Department.


As a result, refineries ran at their slowest pace in 21 years in August, typically one of the busiest months of the year. At the same time, inventories of crude oil kept building at a steady clip, suggesting there was more oil in the market than needed.


Since July 4, gasoline prices have dropped for 17 weeks, to a nationwide average of about $2.22 a gallon, according to AAA, the automobile club. That is about 90 cents less than at the same time last year.


OPEC, whose members account for 40 percent of the world’s oil exports, is scheduled to meet in Algeria next month. An Iranian oil official said on Tuesday that the producers might be forced to meet before that if prices continued to slide.


OPEC’s cohesion will probably be tested in coming months if prices keep falling. Some countries, like Saudi Arabia, can afford to see lower prices for a while, while the price drop is already hurting producers like Iran and Venezuela.


Michael Wittner, the global head of oil research at the French bank Société Générale, in London, said it was probable that OPEC would reduce production by another million barrels a day next month.


“OPEC appears to be taking this very seriously, and they are telling their customers they would be getting less crude,” Mr. Wittner said. “But prices keep falling because despite all that, the markets have been down-shifting to a lower economic growth and slower oil demand.”


David Kirsch, an oil analyst at PFC Energy, said OPEC producers knew they could not alter the market’s short-term view. But by starting to trim their output, they were trying to set the stage for a rebound in prices next year.


“What OPEC is looking for is managing the fundamentals so they can create the conditions for a price recovery at some point, when the global economy starts to recover,” he said.


New york times

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