OPEC has held four meetings in as many months.
"It's less than meets the [image-nocss] eye," said Lawrence Eagles, global head of commodities research at JPMorgan Chase & Co., New York. "This may stem the bloating in stocks but isn't enough to get rid of the surplus."
Crude oil for January delivery declined $3.45, or 7.9%, to $40.15 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange (NYMEX). Futures touched $39.88, the lowest since July 2004. Prices have tumbled 73% from a record $147.27 on July 11.
Inventories rose 525,000 barrels to 321.3 million barrels last week, the U.S. Energy Department said today in a weekly report. Supplies have climbed 11% since September 19.
"They are facing the distinct possibility of oil falling to $30 a barrel and even lower," said Addison Armstrong, director of market research for Tradition Energy in Stamford, Conn. "They have to bring supply down further because they aren't getting any help on the demand front until the second half of next year at the earliest."
The cut is larger than a 2 million-barrel reduction indicated yesterday by Saudi Arabian Oil Minister Ali al-Naimi. OPEC's rate of compliance with a previous output cut is more than 85%, al-Naimi told reporters yesterday before the ministerial meeting that decided production targets.
"I think the market gave every signal that there had to be an additional cut of at least 2.5 million barrels if OPEC expected to bolster prices," Armstrong said. "There is such a lack of trust when it comes to compliance that it was impossible to agree to what was needed. This lack of trust gives members every incentive to cheat on quotas."
Russia cut oil exports by 350,000 barrels per day (bpd) last month and may reduce supply a further 320,000 bpd next year, in collaboration with OPEC, if prices remain weak, Russian Deputy Prime Minister Igor Sechin told OPEC ministers during opening speeches at yesterday's meeting.
Other non-OPEC producers, including Kazakhstan, may trim production as well, Sechin said. Azerbaijan may lower production as much as 300,000 bpd, Azeri Energy Minister Natig Aliyev said in Oran.
OPEC will next meet in March and has no official price target, Khelil said.
"I think the jury should still be out," said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Mass. "We will have to see their compliance. If they come close to their objective, we believe they will forestall a further decline in prices."
Brent crude oil for February settlement declined 37 cents, or 0.8%, to $46.28 a barrel on London's ICE Futures Europe exchange.
U.S. gasoline inventories rose 1.3 million barrels to 204 million barrels in the week ended December 12, the Energy Department report showed. Supplies of distillate fuel, a category that includes heating oil and diesel, climbed 2.94 million barrels to 133.5 million barrels, the highest since November 2007.
"There is nothing bullish in these numbers," said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. "The OPEC announcement looks big on first glance, but really isn't. They are playing with smoke and mirrors."
Inventories have gained because the oil market is in "contango," where crude for future delivery is more expensive than near-month prices, encouraging stockpile increases.
Supplies at Cushing, Okla., where oil that's traded in New York is stored, climbed 21% to 27.5 million barrels, the highest since May 2007.
"The big build at Cushing shows that in a contango market everyone who can is taking delivery, which makes it much more difficult for OPEC to hold it together," Barakat said.
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