Crude Oil Falls Below $40 on OPEC Skepticism, U.S. Supply Gain

Oil fell below $40 a barrel for the first time in more than four years as OPEC failed to convince traders that the glut in crude will diminish and the U.S. government said supplies climbed for the 11th time in 12 weeks.

The Organization of Petroleum Exporting Countries agreed that the group’s 11 members with quotas will trim current production by 2.46 million barrels a day to 24.845 million barrels a day, OPEC president Chakib Khelil said in Oran, Algeria. OPEC has held four meetings in as many months.

“It’s less than meets the eye,” said Lawrence Eagles, global head of commodities research at JPMorgan Chase & Co. in New York. “This may stem the bloating in stocks but isn’t enough to get rid of the surplus.”

Crude oil for January delivery declined $3.45, or 7.9 percent, to $40.15 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures touched $39.88, the lowest since July 2004. Prices have tumbled 73 percent from a record $147.27 on July 11.

Inventories rose 525,000 barrels to 321.3 million barrels last week, the U.S. Energy Department said today in a weekly report. Supplies have climbed 11 percent since Sept. 19.

“They are facing the distinct possibility of oil falling to $30 a barrel and even lower,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut. “They have to bring supply down further because they aren’t getting any help on the demand front until the second half of next year at the earliest.”

Larger Cut

The cut is larger than a 2 million-barrel reduction indicated yesterday by Saudi Arabian Oil Minister Ali al-Naimi.

OPEC’s rate of compliance with a previous output cut is more than 85 percent, al-Naimi told reporters today before the ministerial meeting that decided production targets.

“I think the market gave every signal that there had to be an additional cut of at least 2.5 million barrels if OPEC expected to bolster prices,” Armstrong said. “There is such a lack of trust when it comes to compliance that it was impossible to agree to what was needed. This lack of trust gives members every incentive to cheat on quotas.”

Russia cut oil exports by 350,000 barrels a day last month and may reduce supply a further 320,000 barrels a day next year, in collaboration with OPEC, if prices remain weak, Russian Deputy Prime Minister Igor Sechin told OPEC ministers during opening speeches at today’s meeting.

Other Producers

Other non-OPEC producers, including Kazakhstan, may trim production as well, Sechin said. Azerbaijan may lower production as much as 300,000 barrels a day, Azeri Energy Minister Natig Aliyev said in Oran.

OPEC will next meet in March and has no official price target, Khelil said.

“I think the jury should still be out,” said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts. “We will have to see their compliance. If they come close to their objective, we believe they will forestall a further decline in prices.”

Brent crude oil for February settlement declined 37 cents, or 0.8 percent, to $46.28 a barrel on London’s ICE Futures Europe exchange.

U.S. gasoline inventories rose 1.3 million barrels to 204 million barrels in the week ended Dec. 12, the Energy department report showed. Supplies of distillate fuel, a category that includes heating oil and diesel, climbed 2.94 million barrels to 133.5 million barrels, the highest since November 2007.

‘Nothing Bullish’

“There is nothing bullish in these numbers,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “The OPEC announcement looks big on first glance but really isn’t. They are playing with smoke and mirrors.”

Inventories have gained because the oil market is in contango, where crude for future delivery is more expensive than near-month prices, encouraging stockpile increases.

Supplies at Cushing, Oklahoma, where oil that’s traded in New York is stored, climbed 21 percent to 27.5 million barrels, the highest since May 2007.

“The big build at Cushing shows that in a contango market everyone who can is taking delivery, which makes it much more difficult for OPEC to hold it together,” Barakat said.