Oil price drops 12 per cent on fear of global recession

Oil Prices

The oil price suffered its biggest fall yesterday since the Gulf War a decade ago on mounting fears of a prolonged global recession.

The price of a barrel of Brent crude fell as much as $3.14, or 12 per cent, to $22.30 a barrel on London's International Petroleum Exchange, the biggest one-day drop since January 1991. The last time crude prices fell that fast, the drop was triggered by the US-led assault on Iraqi forces that led to the liberation of oil-rich Kuwait. Brent has now fallen 25 per cent over the last six days from a peak of more than $31 a barrel in the immediate aftermath of the suicide plane attacks on the US.

Lawrence Eagles, an oil analyst at brokers GNI, said the markets had realised America was not embarking on a major land war. "As long as it is restricted to Afghanistan and the rest of the Muslim world does not get too upset, you have to ask what the link would be to oil supplies," he said.

The slump in price came ahead of tomorrow's scheduled meeting of ministers from the 10 members of the Opec. The oil cartel has cut output three times this year to support the price but analysts said it would struggle to push prices up in the face of a global economic slowdown.

Ali Rodriguez, the Opec secretary general, said: "It's a very delicate time at the moment but we're all working to maintain price stability. The signs for the global economy are not at all encouraging."

Mr Eagles said, in public at least, Opec would voice concern over falling prices. "But because of the delicate nature of the current situation, there will be no talk of further output cuts," he said.

There is little hope among industry observers of a fall in the price of crude translating into lower petrol costs for Britain's motorists on garage forecourts. The Petrol Retailers' Association, which represents petrol outlets, said falls in the crude price tended to be absorbed into the oil giants' profit margins. "Unless the Government feels motivated to push the price down, it would be highly unlikely to occur," said a spokesman. "A voluntary reduction would be surprising."

Meanwhile, the UK oil and gas producer BG slashed its forecasts for output growth from 2003 onwards. The group said it was still on target to achieve growth averaging 16 per cent a year up to 2003. But from then on it forecasts a slowdown with average annual growth rates of 11 per cent for 2000-2006. BG said it expected capital expenditure to total £3bn in the 2004-2006 period compared with £5bn between 1999 and 2003. It is targeting an increase in production from 425,000 barrels a day in 2003 to 530,000 barrels by 2006.

Last week Shell cut its output growth target up to 2005 from 5 to 3 per cent, blaming internal difficulties and the challenging economic outlook.