Oil slumps below USD34 per barrel

HOUSTON: A new batch of lousy economic news dragged oil prices down nearly 7 percent Tuesday, as signs from across the globe pointed to a prolonged and painful recession.

Light, sweet crude for March delivery fell $2.58 to settle at $34.93 a barrel on the New York Mercantile Exchange.

A number of other commodities fell hard too as people sought less volatile investments.

"The recession is getting worse in their eyes," said Phil Flynn, an analyst at Alaron Trading Corp.

"We've gone from a year when we didn't think we were going to have enough of any commodity to a situation where we're going to end the year with oversupply."

Energy analysts at Raymond James & Associates said broader market concerns are depressing crude prices, even as President Barack Obama prepared to sign into law the $787 billion stimulus package Tuesday.

"The market doesn't seem to think that this plan is going to solve the economic problems in the short term," Raymond James said in a note to clients Tuesday.

Stocks took a nosedive in trading Tuesday, as Wall Street reacted to unsettling news from the automotive and retail fronts, as well as slumping markets from Asia to Europe.

General Motors Corp. and Chrysler LLC were racing to finish restructuring plans to present to the federal government, but it appeared both may miss Tuesday's deadline.

The plans are supposed to outline how the automakers intend to again become viable and repay billions of dollars of government loans.

Wal-Mart Stores Inc. said Tuesday its fourth-quarter profit fell 7.4 percent.

While results adjusted to account for a labor settlement beat Wall Street forecasts, the world's largest retailer said it might fall short of expectations for the first quarter of this year.

And new data from the Federal Reserve Bank of New York showed weakening manufacturing in the state.

The Empire State Manufacturing Survey hit a new low of negative 34.7. Economists polled by Thomson Reuters were projecting a reading of negative 22.2.

The report is the earliest of several monthly regional snapshots that investors look to for insights on manufacturing.

In afternoon trading, the Dow Jones industrial average dropped about 250 points to 7,600.

It fell as low as 7,553.48 in early trading - just a point away from the blue-chip index's five-and-a-half month closing low of 7,552.29 reached Nov. 20.

Poor economic data from Japan, the world's second-biggest economy, further discouraged investors.

It said Monday its economy shrank 3.3 percent in the fourth quarter from the previous quarter, the worst performance since 1974.

"The economic and inventory data paint a bleak picture for oil demand," said Victor Shum, an energy analyst at consultancy Purvin & Gertz in Singapore.

"Since the beginning of the year, the outlook has worsened."

Oil prices have become extraordinarily volatile because the March contract expires Friday.

That means anyone in possession of a contract must find a place to store the oil in a few weeks.

That has become more difficult each week, with U.S. crude storage hitting 82-week highs, yet some traders say there is no rational for the volatility of this market.

Crude prices fell another 11 percent last week and swung wildly throughout the trading day.

"A rise in volatility is normal, but that said, what we have witnessed over the last month (in the Nymex) market is not reasonable and it is not reflective of underlying fundamentals," wrote analyst and trader Stephen Schork.

"After all, the fundamentals cannot move that fast."

Leaders of the Organization of Petroleum Exporting Countries have said they may go beyond 4.2 million barrels a day in production cuts to prop up prices when they meet next month.

Hussain al-Shahristani, Iraq's oil minister, said Tuesday that current crude prices don't provide "sufficient incentives" for investors to put money into new projects.

That, he warned, could set the stage for a "big shortage" in world supply once the global economy recovers.

In other Nymex trading, gasoline futures tumbled 9.45 cents to settle at $1.1118 a gallon.

Heating oil fell 11.36 cents to settle at $1.1864 a gallon, while natural gas for March delivery slipped 24.9 cents to settle at $4.203 per 1,000 cubic feet.

In London, the March Brent contract fell $2.25 to settle at $41.03 on the ICE Futures exchange (TheStar)