Oil Falls Below $40

US light crude for January delivery, which expires on Friday, fell 42 cents to $39.64 a barrel by 10am UAE time, after falling to $39.19 earlier in the session, the lowest since July 2004, and following an eight percent overnight drop.

London Brent crude for February shed 43 cents to $45.10.

JPMorgan cut its 2009 crude oil forecast to $43 a barrel from a previous $69 a barrel expectation following OPEC's cut.

The Organization of the Petroleum Exporting Countries, eager to build a floor under dipping prices, announced on Wednesday it would cut 2.2 million barrels daily of output starting Jan. 1, slightly more than expected.

It comes on the heels of 2 million barrels a day of cuts since September, but instead of boosting oil prices, it deepened the gloom over demand.

"Countries other than the Saudis are going to have difficulty to comply with this cut. Those oil producing countries, if they want to survive, they have to produce, even at $40 oil," said Tetsu Emori, fund manager at Astmax Co Ltd in Japan.

According to independent observers cited in OPEC's monthly report on Tuesday, the group's compliance in November to existing cuts was only just over 50 percent.

"Prices have to head lower, now that we are through $40. As long as demand continues to weaken, prices will weaken too," Emori added.

Oil below $50 is uncomfortable for all producing nations, but especially for OPEC members Venezuela and Iran, which are dependent on higher prices to fund ambitious domestic programmes.

Traders also took their cue from US crude oil and refined fuel stocks, which rose last week as imports of oil products increased, while domestic refiners curbed output rates in the light of soft demand.

Commercial crude oil stocks in the United States were up 500,000 barrels to 321.2 million, the Energy Information Administration said.

It also said oil demand in the world's top consumer was expected to grow by only 1 million bpd, or 0.2 percent, over the next two decades, as higher vehicle fuel standards and increased use of renewable fuels stifle petroleum consumption.

Author: Ksenia Kochneva