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OPEC Plans Supply Cut as Crude Oil Heads Toward $50

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Grant Smith and Margot Habiby
Monday, Oct 20, 2008

OPEC, the supplier of more than 40 percent of the world’s oil, plans to cut output for the first time in almost two years as the worst financial crisis since the 1930s sends crude toward $50 a barrel.

Options contracts to sell oil at $50 by December soared 50- fold in the past two weeks on the New York Mercantile Exchange. Goldman Sachs Group Inc. and Merrill Lynch & Co. analysts say crude, which fell more than 50 percent from a record high in July to a 14-month low last week, may drop another 44 percent should the world economy slip into a recession.

The Organization of Petroleum Exporting Countries, which meets Oct. 24 in Vienna, three weeks earlier than planned, is facing the weakest growth in demand since 1993 just as new fields come on line from Angola to the Gulf of Mexico. Members may cut daily output by as much as 2 million barrels, President Chakib Khelil said yesterday.

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“OPEC is going to try to prevent some of the price decline,” Francisco Blanch, head of global commodities research at Merrill in London, said in a Bloomberg television interview. “It’s going to be very difficult to stem a price fall.”

Options contracts that allow holders to sell 1,000 barrels of oil for $50 each by December traded for $500 on the Nymex on today, up from $10 on Oct. 3. Oil rose a second day today, gaining 2.4 percent to $73.60 a barrel at 10:53 a.m. in London.

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Budget Pressures

Even at today’s prices, Venezuela and Iran, two of the organization’s 13 members, may struggle to balance budgets because they rely on energy sales for more than half of their revenue, according to estimates compiled by the U.S. Central Intelligence Agency.

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This article was posted: Monday, October 20, 2008 at 4:42 am

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