Oil Futures Slump -Oil price fluctuations are major problem

British Prime Minister Gordon Brown warned Friday that a failure to tackle volatility in oil prices could cost the global economy trillions of dollars and hurt both producers and consumers.

Brown told an energy summit in London that the wild variation in crude prices was the "most pressing challenge" facing the international community and called for improved regulation of oil markets to stabilize prices.

Oil prices have fallen to four-year lows this week despite OPEC's agreement on Wednesday to slash global output.

The British leader pushed for greater investment in clean energy technology as he addressed energy and oil ministers from 27 key oil-producing and consuming countries.

The meeting, also attended by OPEC leaders, is a follow up to June's gathering of oil ministers in Saudi Arabia when prices were at record highs above $140 per barrel and talks centered on how to increase supply to keep up with demand. Crude has since tumbled to around $40.

"Wild fluctuations in market prices harm nations all round the world," Brown said. "They damage consumers and producers alike."

"The risk now is that investment in oil and other energy sources will once again stagnate, supply capacity will begin to tighten just as demand responds to improving economic conditions," he added.

Such failure to invest could cost the world economy an estimated $1.3 trillion a year by 2030, Brown warned.

The Organization of Petroleum Exporting Countries attempted to boost prices this week by slashing a record 2.2 million barrels from its daily production as of Jan. 1, while the bloc's outsiders Russia and Azerbaijan announced their own cutbacks of hundreds of thousands of barrels from the market.

But oil prices tumbled despite the announcement, a clear indication of the growing belief that the world is heading for a long and painful recession in which energy use will continue to erode.

Brown said that the "visionary internationalism" highlighted in the response to the global banking crisis in recent months should now be applied to energy challenges.

When oil prices sink too low, oil-producing countries have less money to invest in production for the future — creating the risk of a spike in prices down the line.

"We all know that extreme oil prices whether too high or too low are as bad for producers as they are for consumers," said OPEC Secretary-General Abdullah El-Badri.

Saudi Arabian oil minister Ali Naimi agreed that the high volatility was the biggest issue facing the oil market. Saudi Arabia is OPEC's de-factor leader.

"The world's present financial climate is clearly one that inhibits innovation," he said. "Oil prices must be maintained at a level that encourages investment, especially in alternative energy sources."
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Oil futures slumped in New York as concern mounted that rising stockpiles at Cushing, Oklahoma, will leave little room to store supplies for delivery next year.

“World crude oil prices are currently driven by barrels of crude in Cushing and not by the OPEC announcement of a 4 million barrels a day cut,” said Olivier Jakob, managing director of Petromatrix GmbH in Switzerland.

Crude oil stockpiles at Cushing, where oil that’s traded on in New York is delivered, climbed 21 percent to 27.5 million barrels last week, the highest since May 2007, the government said in a report on Dec. 17. OPEC’s biggest production cut in more than a decade this week has failed to stop the slump in prices as the deepening global recession saps demand.

Crude oil for delivery in January fell as much as 7.7% to $33.44 a barrel on the New York Mercantile Exchange. The contract expires today.

The more active February contract fell as much as 77 cents, or 1.9 percent, to $40.90 a barrel. It traded at $41.78 a barrel at 1:43 p.m. London time.

“Front-month WTI has been much weaker than anything else in the oil market,” said Mike Wittner, head of oil research at Societe Generale SA in London. “There is a lot of physical crude at Cushing.”

Brent crude for February settlement was at $43.78 a barrel, up 42 cents, on London’s ICE Futures Europe exchange at 1:08 a.m. local time. Brent oil has traded above West Texas Intermediate since Dec. 12 as the build-up in U.S. supplies suppresses New York prices.

Full Capacity

Crude inventories in Cushing may increase to full capacity within “a matter of two or three weeks,” Barclays Capital analysts led by Paul Horsnell said in a research note Dec. 17.

The Organization of Petroleum Exporting Countries, which pumps 40 percent of the world’s oil, agreed on Dec. 17 to cut output by 2.46 million barrels a day starting on Jan. 1. Still, prices have slumped 37 percent this month and are headed for the second-biggest decline in more than five years.

World oil consumption next year will drop by 0.2 percent to 85.68 million barrels a day, OPEC said in a Dec. 15 report. The U.S. Energy Department said on Dec. 9 that global demand will decline 0.5 percent to 85.3 million barrels a day.

OPEC may meet again in Kuwait on Jan. 19 to discuss further production cuts, Chakib Khelil, the president of the group, said today. OPEC will continue reducing output as demand falls, Khelil said in an interview in London.

Fog forecast for Port Arthur today may prolong the closure of the ship channel used to supply crude oil to local refineries. Dense fog is likely in coastal southeast Texas this morning, the National Weather Service said in the latest forecast on its Web Site.