OIL prices slumped back below US$71 a barrel yesterday as a stronger dollar overshadowed expectations of a sizable OPEC output cut and led investors to shed commodities bought as an inflation hedge.
The dollar muscled higher against rival currencies as credit market conditions eased some and on speculation that the US government might roll out another stimulus package in an effort to push the economy out of a deep downturn.
Investors often buy commodities like crude oil as an inflation hedge when the dollar weakens and sell those investments when the greenback rises.
Light, sweet crude for November delivery fell US$3.36 to settle at US$70.89 on the New York Mercantile Exchange. On Monday, the contract rose US$2.40 to settle at US$74.25 a barrel.
Crude oil is down 52 percent from its all-time peak of US$147.27 reached July 11.
In London, December Brent crude fell US$2.31 to settle at US$69.72 a barrel on the ICE Futures exchange.
Alarmed by the rapid slide, the Organization of Petroleum Exporting Countries, which controls 40 percent of the world's oil supply, is holding an extraordinary meeting Friday in Vienna. OPEC's president, Chakib Khelil, said Sunday the group is planning to announce an output reduction that analysts believe could total at least 1 million barrels a day.
But experts are divided over how much impact on OPEC cut will have on prices. Some believe waning global demand for energy will push prices as low as US$50 a barrel, while others say a significant supply reduction could halt the downward the momentum.
"If OPEC does cut production, prices could return to the upside over the next three to six months," said Costanza Jacazio, an oil analyst with Barclays Capital in New York.
She said tighter global supplies could eventually push prices back toward the US$90 range, a level believed to be favored by several OPEC members including Iran and Venezuela.
Oil-producing countries are facing steep serious budget shortfalls as oil prices come down from record levels. Khelil has said OPEC may cut output again at a meeting in December, and that the group considers the oil market oversupplied by about 2 million barrels a day.
Investors are also keeping a close eye on whether non-OPEC producers, such as Russia, will reduce supply as analysts lower price expectations for next year. Deutsche Bank on Monday cut its 2009 oil price forecast to US$60 a barrel from US$92 and predicted US$57.50 for 2010.
"Producers are getting concerned about this downward spiral in pricing since the summer," said Victor Shum, an energy analyst at consultancy Purvin & Gertz in Singapore. "Some governments have based their budgets higher than current prices."
Oil market traders are also closely watching economic conditions in the U.S.
Federal Reserve Chairman Ben Bernanke told the House Budget Committee on Monday that a fresh round of government measures might help ease the country's downturn. There were also signs Tuesday of a reviving credit market as bank-to-bank lending rates eased further.
In other Nymex trading, heating oil futures fell 3.24 cents to settle at US$2.1975 a gallon, while gasoline prices lost 2.82 cents to settle at US$1.6919 a gallon. Natural gas for December delivery rose 10.1 cents to settle at US$7.312 per 1,000 cubic feet.