Oil slumps, OPEC moves to cut excess supply

Oil prices dropped more than a dollar yesterday as dealers took profits on a widely expected move by the OPEC cartel to curb production in excess of its official 27 million barrels per day output ceiling.

A resumption of oil flows through Iraq's northern pipeline to the Turkish port of Ceyhan encouraged further selling, after a 12-day halt. Shippers said the flows of Kirkuk crude resumed to about 450,000 bpd.

US light crude slumped $1.43 to $41.10 a barrel after briefly dipping below $41. London's Brent crude fell $1.52 to $38.15 a barrel.

"Much of the OPEC action had been priced in coming into today's trading and the news about Iraq resuming pumping crude to Ceyhan also kept bulls in check here," said a NYMEX broker.

Ministers said they would implement a cut to output of just over one million bpd from January 1 to bring production in line with the group's official limits, and meet again on January 30 to discuss whether further cuts were necessary.

The Organisation of the Petroleum Exporting Countries has been producing at its highest level in 25 years to meet rising demand in China and fuel strong world economic growth.

Excess supply above formal cartel quota limits has swelled crude inventories to about five per cent above year-ago levels in the United States and pushed crude forward curves into contango, as sellers discount prompt barrels aggressively.

Gains in previous trading sessions stopped a slump to four-month lows but some are cautioning that further tests to the downside could still follow.

"Markets appear to want to test OPEC's apparent resolve to defend prices at $33 for the basket (of OPEC crudes). And promises to cut out 'over-production' may not deter them," said Jan Stuart of brokers Fimat.

Crude prices are still about 30 per cent up on the start of the year but a fall in the dollar's value has eroded OPEC's purchasing power from non-dollar economies.

Consumer nations have urged OPEC not to curb supplies, saying oil stocks need to rebuild to calm volatile prices and underpin economic growth.

Forecasts for a bout of Arctic weather in the United States next week may ramp up demand for winter heating oil and test supplies.

US distillate stocks are running 13 per cent below year-ago levels, according to government data this week.