Oil falls below $40 despite OPEC'S largest-ever output cut

Light, sweet crude for January delivery was down 6 cents to $40.00 a barrel in electronic trading on the New York Mercantile Exchange by mid-afternoon in Singapore. At one point, it fell as low as $39.19 - a level not seen since at least July 2004.

Overnight, the contract fell $3.54 to settle at $40.06 a barrel, after touching $39.88. Â

The 13-nation Organization of Petroleum Exporting Countries (OPEC), which accounts for about 40 percent of global oil supply, said Wednesday it planned to reduce its output quotas by 2.2 million barrels a day.

But markets had already expected a vastly reduced flow of oil and traders focused instead on troubling economic data that points to a long and severe global economic slump.

"The market apparently had already priced in this cut," said Peter McGuire, managing director at investment firm Commodity Warrants Australia in Sydney. "I think OPEC will have to have another meeting in January, and I wouldn’t be surprised to see possibly a 3 million cut next time."

OPEC’s next official meeting is scheduled for March. The group had already announced cuts totaling 2 million barrels earlier this year, also with little effect. The unprecedented production cuts and the market reaction show just how fast energy demand has fallen during the worst economic downturn in at least a generation.

Oil prices have tumbled 73 percent since July. What started as a crisis in the U.S. sub-prime mortgage sector last year has mushroomed into a recession in most developed countries and a sharp downturn in emerging nations.

Companies across the world are laying off workers and banks are reluctant to lend. Plunging property values and high debt levels have led many consumers to pull back spending.

"I’m worried about growth," McGuire said. "You have to get people spending."

Oil prices may fall as low as $35 a barrel during the next few weeks, he said.

U.S. crude inventories rose slightly last week and gasoline reserves increased as demand stayed below year-ago levels, according to government data released Wednesday.

Analysts had expected crude stocks to fall 900,000 barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

In other Nymex trading, gasoline futures were steady at $1.00 a gallon. Heating oil was steady $1.44 a gallon while natural gas for January delivery fell 2.4 cents to $5.60 per 1,000 cubic feet.

In London, February Brent crude rose 2 cents to $45.55 a barrel on the ICE Futures exchange.