By Chris Baldwin
LONDON (Reuters) - Crude oil hovered below $41 a barrel on Thursday, having touched the lowest price since July 2004, after OPEC announced its biggest output cut ever and China slashed domestic fuel prices for the first time in two years.
Oil is $107 off its July peak, shedding value as a global recession cuts into fuel demand. The U.S. January light crude contract sank to $39.19 on Thursday and was then trading up 65 cents at $40.71 a barrel by 7:02 a.m. EST.
London Brent crude for February rose 85 cents to $46.38.
China on Thursday said it will cut domestic fuel prices on Friday for the first time in almost two years to revamp its regulated pricing regime and revive growth.
"We're seeing a little bit of a recovery, and it could be that China price cuts are playing a part, but I think the market has seen its low when we dipped under $40," said Christopher Bellew at U.S. brokers Bache Financial in London.
The China cuts of roughly 13 percent for gasoline and 17 percent for diesel were brought forward from an expected January implementation by the National Development and Reform Commission. Analysts say cheaper fuel in China could stimulate demand.
BACKSLIDING TENDENCIES
The Organization of the Petroleum Exporting Countries on Wednesday made its third output cut since September to try to regain control of falling prices amid slackening demand.
U.S. crude for January delivery tumbled nearly 8 percent on Wednesday as traders dismissed OPEC's 2.2 million barrel per day (bpd) output cut, decided in Algeria.
Some forecasters now predict the first decline in world energy use since 1983.
"The verdict was a resounding vote of no-confidence in the (OPEC) cartel's ability to curtail production given its previous tendencies to backslide on commitments," said Edward Meir of MF Global in a research note.
For OPEC's curbs to be effective the fractious group will need to enforce compliance, historically a tricky task in a falling market. The producer group itself estimates November production cut compliance by its members at around 50 percent.
Next year's outlook is increasingly bleak as economic indicators show a deep global recession taking hold, causing oil demand to fall from the United States to China.
JPMorgan cut its 2009 average crude oil price forecast to $43 a barrel from $69 following OPEC's cut, and analysts say more losses are in store until a sufficient supply is taken off the market or demand levels swing back up.
(Reporting by Chris Baldwin, additional reporting by Annika Breidthardt in Singapore, editing by Anthony Barker)
