West Texas Intermediate fell from the lowest price in more than four years as Saudi Arabia’s oil minister said the price will stabilize by itself, while the United Arab Emirates said OPEC will do what it takes to balance the market. Brent declined in London.

Futures dropped 0.9 percent in New York after declining 2.2 percent yesterday. Saudi Arabia’s oil minister Ali Al-Naimi said tumbling crude prices will stabilize. The world’s largest oil exporter yesterday failed to agree with Russia, Venezuela and Mexico to curb output. U.A.E. Energy Minister Suhail Al-Mazrouei said he is confident OPEC will take the right decision to stabilize the market.

Crude has collapsed into a bear market amid the highest U.S. output in three decades and signs of slowing demand growth. A Bloomberg News survey showed 20 analysts were evenly divided on whether the Organization of Petroleum Exporting Countries will cut supply to support prices. The 12-member group, which pumps about 40 percent of the world’s oil, meets tomorrow to discuss its official production target of 30 million barrels a day.

“Investors were already struggling to hold their nerve ahead of tomorrow’s OPEC meeting, but comments from Ali Al-Naimi increased concerns,” Kash Kamal, an analyst at Sucden Financial Ltd. in London, said in an e-mailed note. “We could see a repeat of yesterday’s trading session, with prices gaining support early on before confidence wanes and gives way to further selling pressure.”

WTI for January delivery traded at $73.42 a barrel in electronic trading on the New York Mercantile Exchange, down 67 cents, at 1:49 p.m. London time. The contract dropped $1.69 to $74.09 yesterday, the lowest close since September 2010. Total volume traded was about 25 percent below the 100-day average for the time of day. Prices have decreased 25 percent this year.

David Fuller's view

Fear is palpable as OPEC members are joined in Vienna, unusually, by officials from other nations dependent on oil exports.  There is also a measure of false (“What, me worry?”) bravado from some national representatives, notably from Russia.  This raises the question: then why are they in Vienna, talking to other oil producers?

The tragic-comic aspect to this frenzied gathering before OPEC’s meeting tomorrow has everyone running around calling for production cuts, from anyone but themselves.  The only oil representative in Vienna who could possibly be enjoying this spectacle, albeit in a sadomasochistic way, is Saudi Arabia’s oil minister, Ali Al-Naimi.  At least Saudi Arabia has enough cash and low-cost production to survive oil prices near current levels longer than any other country that is heavily dependent on oil export revenue.

Oil exporters made the classic mistake of growing fat on high crude prices, and assuming that this cornucopia would enrich them forevermore.  Recently, their response to lower oil prices has been to increase output.  Needless to say this hardly solves their problem of increasing energy production from a variety of sources, made possible by technological innovation. 

Analysts polled by financial channels were evenly divided, initially, as to whether or not OPEC will announce any cutbacks after Thursday’s meeting.  However, this week’s panicky spectacle in Vienna has hardened bearish sentiment among observers.  This leaves Brent and WTI crude prices susceptible to a temporary short squeeze, not long after OPEC’s official announcement.  I maintain that any production cuts will be small and temporary at best, and mainly an attempt to jawbone the oil price higher.

If there is no agreement on production cuts, that will signal Saudi Arabia’s attempt to squeeze US shale oil producers.  This could work, but only temporarily.  US producers will concentrate on their most profitable territories, where costs are considerably lower than the $75 figure frequently mentioned as a breakeven point.  Additionally, shale technology is steadily improving, lowering production costs in the process. 

Global economies benefit enormously from lower oil prices and this is being reflected by their stock markets.  We are likely to see the benefits in GDP growth figures as well, despite other headwinds.  The obvious exceptions are the predominantly oil exporter nations which have not saved sufficiently and have unsustainable government expenditure budgets, including entitlements.  They will have to cut back their levels of expenditure and or devalue significantly.  This will be unexpected by pampered citizens in the wealthier OPEC countries, and destabilising for some regimes.  Stock market indices will remain a good measure of sentiment, and Saudi Arabia has fallen sharply since October.

(See also Tuesday’s Comment on this subject.  Additionally, you may be interested in these articles from Bloomberg Businessweek: Why Russia Said 'No Deal' to OPEC on Cutting Oil Production, and At OPEC Meeting, Saudi Arabia Stares Down Texas and North Dakota.)