Oil slumps below USD40 per barrel, even as OPEC announces big output cut

Oil prices fell below USD40 per barrel in New York overnight before closing at its lowest level since Jul-04 of USD40.06 per barrel. The 8.1% slide in the oil price yesterday came despite the announcement of a record cut in output by OPEC members of 2.2 million barrels per day (mbpd) from 01-Jan-09, taking cuts since Sep-08 to 4.4 mbpd.

Oil prices are now down some 70% from highs in Jul-08 and are unlikely to stop falling until the global economy shows some signs of stabilising.

Airlines are benefiting from lower fuel prices, with IATA last week slashing its members' predicted total oil bill by 18% in 2009 to USD142 billion, based on an average price of USD60 per barrel (Brent).

But the sector is being hit by weaker revenues as the global economy slows. Industry revenues are expected to decline by 6.5% to USD501 billion in 2009 - the first drop in annual revenue since the two consecutive years of decline in 2001 and 2002.

All regions, except the US, are expected to report larger losses in 2009 than in 2008, as international yields fall 3.0% (5.3% when adjusted for exchange rates and inflation) and passenger traffic declines by 3% following growth of 2% in 2008. This is the first decline in passenger traffic since the 2.7% drop in 2001.

Cargo traffic is expected to decline by 5%, according to IATA, following a drop of 1.5% in 2008. Prior to 2008, the last time that cargo declined was in 2001 when a 6% drop was recorded. As a result of its heavy dependence on the cargo segment, Asia Pacific carriers will see losses more than double from USD500 million in 2008 to USD1.1 billion in 2009.

Losses for European carriers will increase ten-fold to USD1 billion in 2009, according to IATA, as Europe's main economies are already in recession. Hedging has locked in high fuel prices for many of the region's carriers in US dollar terms, and the weakened Euro is exaggerating the impact, according to the industry body.

Giovanni Bisignani, IATA's Director General and CEO, stated that despite the oil price falls, the outlook is "bleak", with the industry facing the "worst revenue environment in 50 years".

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