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Oil prices fall on eve of OPEC meeting in Vienna

AS the world's appetite for crude shrinks, OPEC is meeting in Europe to debate whether oil producers should tighten their spigots even more.

Yesterday, benchmark crude for April delivery fell 78 cents to settle at US$46.25 a barrel on the New York Mercantile Exchange.

In London, Brent prices fell 16 cents to settle at US$44.93 on the ICE Futures exchange.

Some analysts expect the Organization of Petroleum Exporting Countries will agree to additional production cuts beyond the 4.2 million barrels per day that it has already announced.

But those announcements have been met only with indifference in recent months.

OPEC said in December it would slash daily production by more than 2 million barrels. Yet oil prices fell afterward, tumbling more than 15 percent within three days.

The 12-member group is notorious for cheating on production agreements, and it still hasn't completed previous rounds of cuts from last year. Meanwhile, oil demand has shriveled up as millions of workers receive pink slips, companies slash spending and manufacturers shutter production plants.

"They're going into this with a lot of uncertainty," Alaron Trading Corp. analyst Phil Flynn said. "If they're not going to cut production, we'll see oil prices drop back to the low US$40s" per barrel.

OPEC ministers sent mixed signals all week about what they'd do, and the price for a barrel of crude lurched between US$42 and US$47.

Analysts say a reduction of between 500,000 and 1 million barrels a day is likely. The Obama administration hopes that doesn't happen, and Energy Secretary Steven Chu said he'll lobby OPEC ministers to forgo more production cuts.

Complicating matters, Russia said this week it will send Vice Premier Igor Sechin to the OPEC meeting in Vienna, Austria. Russia has toyed with the idea of working more closely with OPEC to control the flow of oil to the world.

"It's a big deal" if Russia joins OPEC, analyst and trader Stephen Schork said. Russia sits on 60 billion barrels of proven oil reserves and if it were a member, it would be OPEC's second-largest producer next to Saudi Arabia, according to the Energy Information Administration.

"The post-9/11 world always took comfort in the division between Russia and OPEC," Schork said. "Russia didn't take OPEC's marching orders, and that was good for price. But the world has changed."

The huge swing in energy prices, which rocketed above US$147 last year before plunging to less than US$34 a barrel in recent months, has left oil producers searching for ways to take greater control of the market.

If OPEC calls for a production cut, it will not have a big impact on gasoline costs, analysts say. Refiners, who have been cutting gasoline output to match the billions of miles no longer being driven by Americans, will have a much bigger role, said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.

"This isn't the year for it," he said. "The world is broke and it's not using energy."

The Energy Department said earlier in the week that global demand would fall more than expected this year. And yesterday, two other agencies supported that projection.

The International Energy Agency released its predictions yesterday, saying global oil demand in 2009 would drop for a second consecutive year for the first time since 1982-1983. The IEA cut its forecast for demand this year by 270,000 barrels a day to 84.4 million barrels a day - 1.5 percent lower than a year earlier.

OPEC also lowered its 2009 global demand estimate by 400,000 barrels a day to 84.6 million barrels, 1 million barrels a day less than in 2008. OPEC expects demand for its own crude to fall by 1.8 million barrels a day on the year, to an average of 29.1 million barrels a day in 2009.

And yesterday, the Commerce Department reported that the US trade deficit plunged in January to the lowest level in six years as the economic downturn cut America's demand for imported goods.

The world has much less need for oil now no matter what price it fetches on the market, Flynn said.

"You can get all excited about the future and how things may be, but for now there's still plenty of oil out there," he said.

In other Nymex trading, gasoline for April delivery rose less than a penny to settle at US$1.3529 a gallon and heating oil fell 2.92 cents to settle at US$1.1972 a gallon. Natural gas for April delivery fell 6.3 cents to settle at US$3.932 per 1,000 cubic feet.


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