Opec set to cut oil supplies after weakening demand sparks sharp price fall

Published on Saturday 23 August 2008 14:01

OIL cartel Opec is expected to reduce supplies next month following a sharp fall in crude prices on Friday.

The value of US crude fell 5.5% to $114.59 a barrel – the biggest drop in percentage terms in one day since December 2004. In London, Brent crude dropped $6.24 to $113.92 a barrel.

Analysts put this drop down to rising supply levels and weakening global demand. They said this may lead Opec to cut the flow of oil when it meets in Vienna on September 9. The cartel is the source of about a third of the world's capacity.

A rebound in the US dollar towards the end of last week also encouraged a sell-off, applying downward pressure across the commodities markets, by weakening the purchasing power of buyers using other currencies, dealers said.

The strengthening dollar has reduced investors' appetite to use oil as a financial tool to hedge against inflation risks.

Peter Beutel, analyst at consultancy Cameron Hanover, said: "People who were buying yesterday are taking profits today. There is also renewed technical selling and talk again of demand destruction. The dollar is strong again too."

Demand for oil from China, which hit a two-year high in July, is also expected to drop next month after being boosted by the Beijing Olympic Games. Analysts said the Chinese government will now ease pressure on oil firms to guarantee supplies. They added that the boom in the country may not have a solid base.

Friday's losses came after a big climb in prices earlier in the week, supported by rising tension between the United States and Russia, the world's second-biggest oil producer.

Russia said this week it would respond with more than a diplomatic protest to a US deal with Poland to station parts of a US missile defence shield on Polish soil.

Relations between Russia and the West had already been strained by Moscow's military intervention in Georgia. This conflict has disrupted rail shipments of Azeri oil through the region.

Supply of oil will also be increased this week as operations on the Baku-Tbilisi-Ceyhan oil pipeline are ramping up.

Concerns that high energy costs are taking a toll on global fuel demand have played a big role in oil's sharp descent from peaks above $147 a barrel in mid-July. But oil prices remain up about 15% so far this year.