Crude Oil Falls on Concern OPEC Reductions Will Be Insufficient

Dec. 15 (Bloomberg) -- Crude oil fell on speculation that OPEC production cuts may be insufficient to bolster prices as the global recession curbs fuel consumption.

U.S. fuel demand may drop further as manufacturing in the country declines. Chinese crude processing tumbled to the lowest in 15 months, a report showed. Prices rose earlier today when OPEC Secretary-General Abdalla El-Badri said the group needs to make a “sizable” output cut at this week’s meeting in Algeria.

“It’s becoming clear to some traders that no matter what OPEC does, it may not be enough, given the demand picture,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut.

Crude oil for January delivery fell $1.77, or 3.8 percent, to settle at $44.51 a barrel at 2:43 p.m. on the New York Mercantile Exchange. The price has tumbled 70 percent from a record $147.27 on July 11.

Industrial production declined 0.6 percent in November, the third drop in four months, the Federal Reserve said today in Washington.

China’s refineries processed 27.27 million tons of crude last month, or 6.64 million barrels a day, as an economic slowdown cut demand, the China Mainland Marketing Research Co. said in a statement today. That’s down 8.5 percent from 29.8 million tons in October. China is the second-biggest oil- consuming country, after the U.S.

“The demand side of the oil picture is looking gloomier after the release of the latest Chinese consumption numbers,” Armstrong said.

Lower Demand

The International Energy Agency, which coordinates energy policy in 28 developed countries, said in a Dec. 11 report that global oil demand will contract this year for the first time since 1983 and cut its outlook for 2009.

Consumption worldwide will shrink by 200,000 barrels a day, or 0.2 percent, to 85.8 million barrels a day in 2008, the IEA said in the monthly report. Next year consumption worldwide will increase by 400,000 barrels a day, or 0.5 percent, to 86.3 million barrels a day, the report showed. That was down 200,000 barrels a day from November’s forecast.

The Organization of Petroleum Exporting Countries will probably lower production targets by at least 2 million barrels a day, or 7.3 percent, at a Dec. 17 meeting in Oran, according to 18 of 33 analysts surveyed by Bloomberg News.

4 Million Barrels

“OPEC will have to cut 4 million barrels a day at a minimum, given the drop in demand and because of non-OPEC production, to stop the fall in prices,” said economist Philip Verleger, president of PKVerleger LLC in Aspen, Colorado.

Global stockpiles can meet 57 days of world demand, five days more than the five-year average, OPEC President Chakib Khelil said.

“Stocks are very high, we need to take action at this time,” El-Badri told reporters when he arrived at his hotel in Oran today. The oil market has 100 million barrels in excess stockpiles, he said.

The group, which agreed in October to reduce production by 1.5 million barrels a day starting Nov. 1, has implemented 75 percent of the cut, Khelil, who is also Algeria’s oil minister, told reporters in Oran.

“Everybody supports the cuts, I don’t have any doubts about it,” Khelil said. “The Saudis have reduced their supply to the market by 8 percent, which has had an effect on the market.”

Request of Russia

OPEC is asking Russia, the second-largest producer after Saudi Arabia, to reduce oil output by 200,000 to 300,000 barrels a day to help revive prices, OAO Lukoil Chief Executive Officer Vagit Alekperov said in Moscow today. Alekperov and Russia’s Deputy Prime Minister Igor Sechin are attending the meeting.

“In addition to an OPEC cut of 4 million barrels, Russia will have to cut by 400,000 barrels to support prices, and I don’t think either of these will happen,” Verleger, said.

February oil options rose and January contracts fell as traders rolled their positions in electronic trading before the expiration of January options tomorrow in New York. Bets that January oil will rise above $50 a barrel were the most active of the day. Bets February oil will fall below $40 or rise above $53 were the most active contracts for the next trading month.

January $50 calls fell 65 cents to 16 cents a barrel, or $160 a contract, at 1:24 p.m. on the New York Mercantile Exchange. The contract traded 1,168 lots. One contract is for 1,000 barrels of oil. January $45 puts added 10 cents to $1.60 a barrel, or $1,600 a contract, on trading of 827 contracts.

Volume in electronic trading on the exchange was 425,982 contracts, as of 2:59 p.m. in New York. Volume totaled 578,164 contracts on Dec. 12, up 12 percent from the average over the past 3 months. Open interest on Dec. 12 was 1.16 million contracts. The exchange has a one-day delay in reporting open interest and full volume data.

Brent crude oil for January settlement declined $1.81, or 3.9 percent, to settle at $44.60 a barrel on London’s ICE Futures Europe exchange.