OPEC's plan to raise oil prices by cutting output has backfired, as prices briefly dipped below $40 a barrel - their lowest point since July 2004, yesterday.

The 13 nations belonging to the Organisation of the Petroleum Exporting Countries announced an agreement to slash daily production at the start of next year by 2.2 million barrels - a total of 4.2 million barrel since September 2008. 

Crude oil futures for January delivery fell $1.77 to close at $44.51 a barrel on the New York Mercantile Exchange after trading as high as $50.05 during the day.

Having reviewed the oil market outlook, including overall demand / supply projections for the year 2009, in particular the first and second quarters, the OPEC conference observed that crude volumes entering the market remain well in excess of actual demand: this is clearly demonstrated by the fact that crude stocks in OECD countries are well above their five-year average and are expected to continue to rise.

Moreover, the impact of the grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices, which have fallen by more than $90 a barrel since early July 2008.

The OPEC noted that, if unchecked, prices could fall to levels that would jeopardise the investments required to guarantee adequate energy supplies in the medium-to-long term.

They agreed to cut 4.2 million barrels a day from the actual September 2008 production levels of 29.045 mb/d, with effect from 1 January 2009, with member countries resolving to abide by their individually agreed production reduction.

Russia does a wait and watch
Oil leaders in Russia, the world's second-largest crude producer after Saudi Arabia had said it might cut output in tandem with OPEC, But Russia instead maintained cuts of 600,000 barrels a day already implemented last month.

Also, analysts were sceptical that OPEC would fully comply with cuts announced Wednesday. It is said that the cartel has complied with a little more than half the cuts announced in October, though OPEC said that more than 85 per cent cuts were complied with.

US oil consumption falling
Energy Information Agency (IEA) reported a falling demand for oil in the US market adding to pressure on oil prices.

For the first time in more than 20 years, virtually no growth is projected in US oil consumption, reflecting the combined effect of recently enacted CAFE standards, requirements for increased use of renewable fuels, and an assumed rebound in oil prices as the world economy recovers.

With overall liquid fuel demand  growing by only 1 million barrels per day between 2007 and 2030, increased use of domestically-produced biofuels, and rising domestic oil production spurred by higher prices, the net import share of total liquids supplied, including biofuels, declines from 58 per cent in 2007 to less than 40 per cent in 2025 before increasing to 41 per cent in 2030