Opec calls emergency summit as oil price halves

Oil slumped below $70 per barrel yesterday, hitting a 14-month low – the price has halved in the last three months – and prompting the world's oil-producing countries to call an emergency meeting next week to discuss cutting back on production.

As Abdalla Salem El-Badri, the secretary general of the 13-strong Organisation of Petroleum Exporting Countries (Opec), announced that the group would meet next Friday, instead of in mid-November as planned, the Qatari oil minister was anticipating production cuts of more than 1 million barrels per day to stabilise the price. Ecuador's oil and mines minister, Derlis Palacios, also called for cuts, quoting an ideal figure of $80 per barrel.

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The oil price has all but collapsed from the unprecedented high of $147 in early July, as the combination of the rising dollar, turmoil in the financial markets and slowing demand took their toll. But the trigger for yesterday's further slide of nearly $5 was the latest grim data from the US.

Hot on the heels of reports earlier in the week that September saw the biggest monthly fall in retail sales in more than three years, US government data yesterday showed unexpectedly large stockpiles of both crude oil and gasoline stocks, while industrial output for September fell by the most in 33 years. Crude inventories were up by 5.6 million barrels last week, compared with the 1.9 million forecast; gasoline climbed by 6.97 million barrels, more than twice the 3 million barrel expectation.

Opec has already cut supply targets once, by about 500,000 barrels per day, to try to stabilise the falling price. As the price fell by more than $5 in a single day and dipped below $80 last week, the group said it would convene an extraordinary session on 18 November in Vienna to discuss the ripple effect of the upheavals in the world's financial centres on the oil market. That meeting will now be on 24 October, and although Gordon Brown greeted the news with the statement that a cut in production would be "wrong" for the global economy, it now seems inevitable.

As recession looms, oil forecasts are being rapidly rewritten. Last week, the International Energy Authority revised its predictions for 2008 downwards by 240,000 barrels per day (bpd), and for next year by 440,000 bpd compared with the previous month's report.

This week it was Opec's turn. The group's October oil report cut the previous month's consumption forecast for 2008 by 330,000 to 550,000 bpd and revised the 2009 figures down by 100,000 to 800,000 bpd. "The ongoing downward trend in crude oil prices reflects the dramatically worsening conditions in global financial markets in recent weeks and their negative impact on the real economy, as well as the decline in the demand for oil," Opec said.

With banks collapsing and stock markets the world over going into freefall, Opec could be right to be scared. But despite the panic, the cartel may be playing a sophisticated game. There is a clear link between the falling price and real economic factors.

But further precipitous falls will be down to sentiment, rather than reality, according to John Waterlow, a principal analyst at Wood McKenzie. "Opec got it wrong in 1997-98, when the Asian economic crisis came just when they were increasing production and the oil price dropped sharply, and ever since they have been terrified of a similar loss of control," Mr Waterlow said.

"The price kept rising until July because people were obeying the herd instinct and just kept piling in to buy. Now we are on a similar trajectory, but downwards, and the rearranged Opec meeting is to try to show that it will do something about it."

Oil is not the only commodity to be suffering from fears of recession. Platinum dropped by 12 per cent yesterday over concerns about demand for cars, which account for around half of global demand. Silver fell by nearly 10 per cent, palladium by 13 per cent, zinc and lead by 10 per cent. Copper was off by almost 8 per cent, taking it to a 33-month low. Aluminium also fell and has now lost more than a third since a record high in July. Nickel and tin fell. Even gold, often seen as a safe haven in troubled times, was down 6 per cent.

Ian Henderson, a fund manager at JP Morgan, said: "The current financial outlook, with trillions of dollars of wealth being destroyed, is colouring people's expectations on the demand for commodities over the next couple of years, if not longer."

But concern over slowing industrial output is not the only factor affecting commodity prices. With hard-pressed banks demanding more collateral, customers such as hedge funds are unwinding their positions and skewing the market even further. "A typical position was long on commodities, short on financials, so as the hedge funds have to pare back they are forced to reduce positions in order to stay within their banking covenants that is not constructive towards prices," Mr Henderson said.

Over the longer term, demand is likely to remain stable – despite yesterday's statements from Rio Tinto, the mining giant, that the hungry Chinese economy is "pausing for breath" as the West's appetite for its exports is threatened. "Emerging economies now account for 55 per cent of all commodities demand, so the effect of a decline in the developed world will be less important than it was," Mr Henderson said.