Oil price plunges after Russia defies call to slash production

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The Independent Online

The oil price plunged yesterday after an attempt by the producers' cartel to give it a boost backfired when Russia rejected calls for a major cut in output.

Russia defied pleas from Opec, the Organisation of Petroleum Exporting Countries, to help prop up oil prices by slashing production. Instead, it agreed to a token cut of 0.7 per cent or 50,000 barrels a day.

Brent crude fell as much as $1.30 or 6.5 per cent yesterday to $18.60 a barrel. The fall triggered a dive in the share prices of oil companies, which hit the London stock market.

The FTSE 100 index fell as much as 119 points or 2.2 per cent ­ BP dipped 4.4 per cent and Shell fell 3.1 per cent ­ as investors feared for a downturn in profits as the oil price continued to fall.

Opec last week announced a cut in output of 1.5 million barrels a day but said it was conditional on Russia, Norway and Mexico cutting production by 500,000 barrels between them.

Opec wants to push the price back within the range of $22 to $28 a barrel it believes is sustainable. Two weeks ago, Russia offered to reduce exports by 30,000 barrels out of its daily production of 7 million, an amount dismissed by Opec as insignificant.

The oil price has fallen 30 per cent since mid-September when it peaked at about $30 a barrel in the wake of the US terrorist attacks, which the markets feared would trigger a fresh Middle East conflict.

On Thursday, oil surged after Norway said it would cut between 100,000 and 200,000 barrels if other Opec and non-Opec producers carried out cuts. While Russia's deal applies only to exports for the remainder of this year, it agreed to consider next month whether to order wider reductions in the first quarter of 2002.

Ali Rodriguez, the secretary-general of Opec, welcomed the pledges by Russia, Mexico and Norway to cut output but stopped short of saying they were enough to trigger output cuts from 1 January by the cartel.

Lawrence Eagles, oil analyst at the brokers GNI, said Russia's decision was influenced both by global politics and demands from its strongest oil companies not to sanction a cut.

"Russia is seen as a global heavyweight and it would not want to be seen to be pushed around by a cartel," he said. "It would prefer to react positively to a cut by Opec rather than be forced into it." But he said it was unlikely that Opec would agree to another unilateral cut as several of the major exporters, including Saudi Arabia, were fed up with sacrificing market share.

Opec production is expected to fall to 25 million barrels a day from 29 million last year over a period when total production will rise by a million barrels. This would equate to a fall in market share from 38 per cent to 32 per cent.

Mr Eagles said that until there was firm news from Russia the oil price would fluctuate between $17 and $20 a barrel.

This will come as a huge boon to Western governments as falling oil prices act as a tax cut, freeing up more money for households to spend on other goods.

Dylan Grice, an economist at the investment bank Dresdner Kleinwort Wasserstein, said a $10 fall in the oil price should boost European GDP by 0.2 per cent. "Cheaper oil will act as a significant tailwind to real economic growth in the second half of 2002, peaking in 2003," he said.

It would also help central banks by pushing inflation down, by as much as 0.2 percentage points in the UK next year, according to DKW's research.

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