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Crude falls sharply, as OPEC declines to cap production at tense meeting

Published 12/04/2015, 02:36 PM
Updated 12/04/2015, 02:43 PM
WTI crude closed under $40 on Friday, while brent crude closed just above $43

Investing.com -- Crude futures fell considerably on Friday, as OPEC declined to cap its production ceiling after the divided group was unable to agree on a strategy to curb the continuing oversupply on global energy markets at a contentious meeting in Vienna.

While Friday's decision was not unexpected, the ambiguous policy statement may create further instability on worldwide markets as the leaders left Austria seemingly without any strategy for rescuing prices from near-record lows. Instead, OPEC leaders demurred at the semiannual meeting, opting to wait at least six months to update its production quota when it meets next in June.

OPEC leaders appear hesitant to alter their strategy until a bevy of economic sanctions against Iran are lifted against the Gulf state next year. When the sanctions are fully eased, Iran is expected to boost its production by as much as 1 million barrels per day.

"The future of OPEC is as strong as ever," OPEC Secretary General Abdullah al-Badri said at a press conference, following the six-hour meeting. "We have to accommodate Iran one way or the other. Also, production changes from time to time so we decided to postpone this decision to the next OPEC meeting."

On the New York Mercantile Exchange, WTI crude for January delivery traded between $39.61 and $41.98 a barrel before settling at $39.98, down 1.08 or 2.64% on the session. With the sharp decline, U.S. crude futures shed most of their gains from Thursday's session triggered by a massive sell-off in the dollar. WTI crude has now closed lower in five of the last seven session. The front month contract for U.S. crude ended a choppy, volatile week down approximately 4%.

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On the Intercontinental Exchange (ICE), brent crude for January delivery wavered between $42.69 and $44.81 a barrel before closing at $43.02, down 0.82 or 1.86% on the day. North Sea brent futures also ended the week down by more than 3%. The spread between the international and U.S. domestic benchmarks of crude stood at $3.04, above Thursday's level of $2.80 at the close of trading.

Both benchmarks are lingering near six-year lows, as global supply continues to severely outpace demand.

OPEC, which pumps approximately 35 to 40% of the world's total consumption, entered Friday's meeting with a production ceiling that hovered around 31.5 million barrels per day. The total is expected to increase over the next year after Indonesia officially re-joined the world's largest oil cartel, following a seven-year hiatus. The Southeast Asian nation produces roughly 910,000 barrels of oil per day.

Crude prices worldwide are down by more than 40% since OPEC roiled markets last November by maintaining its production at levels above 30 million barrels per day. The tactic was purportedly aimed at squeezing out high-priced U.S. shale producers, which struggle to maintain output when crude prices dip. Over the last year OPEC has altered its approach of favoring price control over production in an effort to regain market share. Crude prices, as a result, have tumbled amid excess supply throughout the world.

The cartel also reportedly tabled a proposal by Venezuela for a 5% reduction in output and failed to reach an agreement with non-OPEC member Russia on a joint effort to slash production.

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"The world's dynamics have changed and we need to look at other parameters for sustaining prices," OPEC president Emmanuel Ibe Kachikwu said. "Even if we keep cutting production that doesn't solve any problems. We need to look to non-OPEC members also to join us in this stability drive."

"As OPEC grows as an organization it has to begin to look at cooperation, collaboration and cost efficiency. There are many ways to influence prices and that's what we've decided to do."

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, jumped more than 0.75% to an intraday high of 98.62. A day earlier, the dollar suffered its worst loss against the euro in six years.

Dollar-denominated commodities such as crude become more expensive for foreign purchasers when the dollar appreciates.

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