Oil prices ignore Opec cut, fall below $34/bbl

Fears of a deepening recession in global economies destroying demand for crude oil drove down prices of the commodity to below $34 per barrel on the New York Mercantile Exchange, its lowest in over four years.

Crude oil prices have ignored a record 2.5 million barrels per day cut in production by the Organisation of Petroleum Exporting Countries (Opec), which supplies 40 per cent of the world’s oil, a Mumbai-based analyst said. Prices have fallen by over 22 per cent since the group announced its decision to cut production on Wednesday.

Lower oil prices pushed down the share prices of India’s crude oil producers on the Bombay Stock Exchange as they will now have to sell their oil at lower rates. The share price of Oil and Natural Gas Corporation fell 3.23 per cent while that of Cairn India fell 4.26 per cent.

Crude oil refining companies, which buy oil, saw their share prices rise. Indian Oil Corporation, India’s largest refiner, rose 3.90 per cent on the Bombay stock Exchange. Bharat Petroleum Corporation rose 4.49 per cent and Hindustan Petroleum Corporation rose 1.86 per cent. The benchmark Sensex traded flat on Friday.

The nearest month – January – futures contract of US light sweet crude oil on Nymex fell by over 6 per cent on Friday to its second-biggest weekly decline since 2003. The January contract expires today.

The February contract is trading at $42 per barrel, nearly 16 per cent higher than the January contract. This spread between the two contracts is the widest in the last 20 years.

A wide difference between prices of the two most recent contracts allows companies and traders to buy oil at lower prices in the most recent contract and lock in higher prices for the later contract. This increases stocks leading to further decline in prices in the near contract.

The June 2009 contract is trading at over $50 per barrel.

Prices of Brent crude oil, the most widely traded variety of oil, rose to around $44 per barrel in London trading. Higher Brent crude oil prices keeps India’s oil import price high as Brent makes up around 38 per cent of the basket.

The Indian basket of crude oil fell by a little over a dollar on Thursday to $41.84 per barrel, the latest day for which data are available. The price of this basket, which also comprises of Oman-Dubai sour grade crude oil, tracks global crude oil prices with a day’s lag.

“Price of the Indian basket will most likely fall below $40 a barrel on Friday,” said another Mumbai-based analyst.