Opec on Friday slashed production but oil prices continued to fall as concerns about the global economic crisis sent crude to its lowest level in 16 months.

The cartel, which produces 40 per cent of the world’s oil, agreed to cut its output ceiling by 1.5m barrels a day, or about 4.5 per cent, from November. Some members, including Venezuela and Iran, had wanted a cut of as much as 2m b/d.

But the reduction, which in normal times should have led to a jump in prices, failed to stop the slide in the crude price. It fell on Friday to $62.65 a barrel, the lowest level since June 2007, on the strength of the US dollar and falling equity markets.

The prospect of further falls sent investors scrambling for protection, with the cost of insuring against a drop in the price to $50 before the end of the year almost tripling overnight. The price of put options at $50 for December – giving the holders the right to sell then at that price – jumped to $1.50 per contract, up 142 per cent from 62 cents on Thursday.

Edward Meir of MF Global in New York said: “The cartel is pushing against a hostile market environment towards energy, nurtured primarily by the increasingly dire economic backdrop.”

However, some analysts warned that Opec’s decision would tighten the market in two to three months, resulting in higher prices in early 2009.

Paul Horsnell of Barclays Capital said the market could often be slow to react to a production cut.

“Prices did not bottom for three months after the last cycle of formal Opec cuts began in October 2006,” he said.

Saudi Arabia at first resisted Friday’s emergency meeting in Vienna, which was pushed by Algeria and Libya. Initially the group had widely divergent views on the depth of the cuts but as oil prices fell and put options indicated that traders were betting they could slip to $50 a barrel, Opec members agreed they had to act decisively.

Rafael Ramirez, Venezuela’s energy minister and one of the most hawkish members of the group, said Opec had to “avoid a price collapse like 1998”, when Asia’s financial crises pushed oil to below $10 a barrel.

Ali Naimi, Saudi oil minister, hinted that Opec could meet in the short term, even before December’s planned meeting. “We’re prepared to meet more often to stabilise the market,” he said.

Opec’s total reduction could amount to as much as 1.8m b/d, or 6 per cent, as members first cut the 300,000b/d they are producing in excess of Opec’s ceiling and then implement the 1.5m agreement.

Washington, London and the International Energy Agency, the western countries’ energy watchdog, all attacked Opec’s cut, warning that it could aggravate the current economic crisis. But Opec ministers dismissed the criticism.

“Oil prices have witnessed a dramatic collapse – unprecedented in speed and magnitude,” the cartel said in a communiqué. Opec went on to explain its action as a way of contributing to more investment in the oil sector, warning that falling prices “may put at jeopardy many existing oil projects and lead to the cancellation or delays of others, possibly resulting in a medium-term supply shortage”.

Beyond Friday’s price fall, the key signal for prices in the medium term will be Opec’s adherence to its agreement. Many traders doubt that it will fully implement the cuts, noting that historically the group has managed about a 60 per cent adherence rate. But Chakib Khelil, Algeria’s energy minister and Opec’s president, insisted that the group had “no other choice” and it was having trouble selling its oil as buyers stayed away or were unable to secure letters of credit.

Many of the cutbacks will also hit international energy groups working in Opec countries, including ExxonMobil and Chevron of the US, and Total, Royal Dutch Shell, Eni and Statoil of Europe.

Saudi Arabia, which produces its oil without the help of international energy groups, has already quietly cut its production. Other countries will shoulder less of a burden because they produce fewer barrels of oil.

But their adherence will be a key indicator of whether Opec is able to act cohesively as it embarks on its most critical but also most difficult challenge in more than a decade.

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