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Crude dips below $40 despite OPEC output cut

Latest update : 2008-12-19

The price of crude oil sank to below 40 dollars a barrel for the first time in more than four years despite OPEC promising an output cut in the New Year, signaling deepening global economic malaise.

AFP - Crude oil dipped below 40 dollars for the first time in over four years Wednesday despite an OPEC pledge to cut output, in a sign of the global economic malaise, while the IMF pressed for more stimulus moves.

Crude futures fell as low as 39.88 dollars a barrel on the New York Mercantile Exchange, the lowest since July 2004, before closing down 3.54 dollars at 40.06 dollars a barrel.

The drop came even as the market shook off a decision by OPEC oil ministers Wednesday on a record output cut of 2.2 million barrels a day in a bid to reverse the steady slide in crude prices, which had hit 147 dollars earlier this year.

"The world economy is getting worse and worse, that means lower petroleum consumption," said James Williams at WTRG Economics.

"So I think OPEC is having trouble getting ahead of the drop in the consumption."

In a bid to drive up flagging oil prices, ministers from the Organization of Petroleum Exporting Countries cartel agreed at talks in Algeria to reduce output by 2.2 million barrels per day in the group's biggest-ever cut.

Non-member producers Russia and Azerbaijan also said they would cut output.

The International Monetary Fund meanwhile urged action to help battle a global recession.

"My primary message is that additional -- and vigorous -- policy action will be needed in order to avoid a serious global downturn," John Lipsky, deputy managing director of the International Monetary Fund, said in New York.

The IMF number-two official recalled that the multilateral institution had called for ambitious economic stimulus plans, marshaling financial firepower of at least 2.0 percent of economic output by each country.

"We would recommend that some major countries add significantly more than 2.0 percent of GDP (gross domestic product) in fiscal spending, because others are not in a position to contribute at all," he said, without elaborating.

In Germany, Chancellor Angela Merkel came under pressure after officials warned that Europe's biggest economy could contract by as much as three percent next year, which would mark the worst recession in its post-war history.

According to a report in the Sueddeutsche Zeitung newspaper, Germany will also take on new debt of at least 30 billion euros (42 billion dollars) in 2009, more than double the amount this year.

Economists meanwhile warned that European countries faced the prospect of deflation after official EU data showed a sharp drop in Eurozone inflation to a 14-month low of 2.1 percent in November from 3.2 percent in October.

Howard Archer, an economist at the IHS Global Insight research consultancy, said that "a brief period of deflation certainly cannot be ruled out."

UBS economist Sunil Kapadia said the decrease in food and energy prices could drive annual inflation "possibly into negative territory" next year.

The markets were still digesting a landmark move by the Federal Reserve to cut key rates to near zero and a pledge to take more steps to revive economic activity.

The Fed reduced the target fed-funds rate from one percent to a range of zero to 0.25 percent -- the lowest since it began publishing the target in 1990 -- and said rates would be kept "exceptionally low" for now.

It said it would use "all available tools" to promote growth.

"The Fed is being pushed into a corner," said Grant Williamson, an adviser at Hamilton Hindin Greene stockbrokers in New Zealand. He said the steep rate cut "shows how severe things are over there."

Some said unease was being heightened by growing fallout from the alleged 50-billion-dollar fraud of onetime Wall Street high-flyer Bernard Madoff.

Madoff was ordered to wear an electronic tag and obey a curfew, as a probe intensified into his activities. Madoff avoided what would have been his first court appearance since his arrest last Thursday by agreeing to stringent new restrictions under his 10-million dollar bail.

Some of the world's biggest banks, professional investors and charities have fallen victim to the mammoth fraud allegedly carried out by Madoff, which has also turned the spotlight on lapses in US financial regulation.


Date created : 2008-12-18