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)
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Oil tumbles below USD40 per barrel

Oil prices tumbled below US$40 for the first time since the summer of 2004 yesterday despite an announcement from Opec of a record production cut of 2.2 million barrels a day.

The drop shows that even the mighty Organisation of Petroleum Exporting Countries has little sway over a growing global recession, analysts said. Crude prices are down more than 72 per cent from their summer peak of US$147 a barrel, yet tankers continue to idle in the Gulf of Mexico and other ports waiting for buyers.

"There's just so much oil in inventory out there right now," said Michael Lynch, president of Strategic Energy & Economic Research. "Nobody wants to buy this stuff."

Markets had already priced in a vastly reduced flow of oil and traders focused instead on troubling economic data that points to a long and severe recession.

Light, sweet crude for January delivery tumbled 8 per cent, or US$3.54, to settle at US$40.06 on the New York Mercantile Exchange. Benchmark crude prices fell as low as US$39.88, a price last seen in July 2004.

Opec 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.

"You've got a commodity that people are buying less of because they can't afford to buy more," said Phil Flynn, an analyst at Alaron Trading Corp. "People are fearful. They have a lack of confidence in the economy. They're closing their factories."

Lynch said global demand has slowed to its worst point since the early 1980s. Economists previously thought China and other developing countries were impervious to a global recession, he said.

"Now it's pretty clear that things are going to be bad everywhere," Lynch said.

US gasoline inventories continued to rise, the government reported, providing further evidence of a major pullback by American motorists.

Demand for gasoline over the four weeks ended Dec 12 was 2.7 per cent lower than a year earlier.

Grim economic news radiates out of the US, Europe and Asia almost daily as consumers and industries pull back on spending.

The Cooper Tire and Rubber Co said yesterday it will cut 1,300 jobs and close a plant in Georgia.

Newell Rubbermaid Inc is reducing its salaried work force by as much as 10 per cent. The Atlanta-based company slashed its fourth-quarter and full-year profit guidance yesterday.

In Detroit, General Motors Corp put the brakes on construction of an engine factory trying to hold on to the cash that it has left.

Meanwhile, the dollar suffered its biggest one-day decline against the euro after the Federal Reserve cut a key lending rate target to historic lows.

That would typically lead more investors into the crude market because oil is bought and sold in dollars and you can get more bang for the buck.

But investors in this harsh economic climate are holding onto their wallets like never before, betting there's not enough global demand to support higher crude prices, said Gene McGillian, an analyst at Tradition Energy.

"Oil prices should be a lot stronger," McGillian said.

The last time oil prices dipped below US$40 a barrel was on July 21, 2004. Prices settled that day at US$40.09, according to Peter Beutel, an oil analyst at Cameron Hanover.

Many analysts believe oil prices will continue falling next year with agencies ranging from the US Department of Energy to the International Energy Agency forecasting weak demand.

IHS Global Insight chief economist Nariman Behravesh was among the industry experts forecasting lower prices for oil.

"Oil prices will (easily) fall below US$40 per barrel in the next year, and could tumble all the way to US$30," Behravesh said in a research note. "With the economic outlook deteriorating by the day, futures markets for commodities have not priced in the full extent of the 'demand destruction' taking place."

Doubts also remain about the willingness of some Opec members to adhere to price-boosting production quotas.

"Opec has lacked credibility for a long time on discipline," said Gerard Rigby, energy analyst at Fuel First Consulting in Sydney. "Opec is going to have to show they are committed to the cut, that it's not just talk."

US crude inventories rose slightly last week despite expectations for a drop, while gasoline reserves increased as demand stayed below year-ago levels, according to government data released yesterday.

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

Gas prices, because it must be refined from crude, almost always lags the movement in oil prices.

Retail gas prices, which hit a low of US$1.656 a gallon on Friday, rose to US$1.667 a gallon yesterday, according to auto club AAA, the Oil Price Information Service and Wright Express. — AP

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US gas prices dip below US$2, lowest in 3-plus years

HOUSTON, Nov 22 — Only four months after peaking at an unheard of US$4.11 (RM14.80) a gallon, the national average price for gasoline tumbled below US$2 yesterday, its lowest point in more than three years. Yet the global economic contrast between then and now could not be more stark.

On March 9, 2005, the last time gasoline cost less than US$2, the Dow Jones industrial average closed at 10,805.63. After a huge rally yesterday, the Dow closed at 8,046.42.

There was muted joy for consumers wading through an economy that's almost certainly in recession, with thousands of jobs being lost and mortgage foreclosures continuing to rise to record levels.

On the New York Mercantile Exchange, where oil futures seemed destined to breach US$200 just a few months ago, pessimism was an understatement.

"At this point, all we can say with any degree of confidence is that crude oil ... will not trade below zero," trader and analyst Stephen Schork said yesterday in a tongue-in-cheek analysis of the market's swoon.

Crude has been in free-fall, shedding two-thirds of its value since July, and gasoline prices have followed. Some say oil could be headed below US$40 a barrel, and gasoline below US$1.50.

Motorists in Independence, Montana, yesterday said they were paying US$1.37 for a gallon of gas.

The pump price for regular unleaded fell 3.1 cents overnight to an average of US$1.989 a gallon nationally, according to auto club AAA, the Oil Price Information Service and Wright Express.

The national average price fell nearly a dime in the past week and almost 90 cents in the past month. The average price for unleaded is now below US$2 in 30 states, according to AAA.

"It's impossible to know exactly how low the price of gasoline will eventually go," AAA spokesman Geoff Sundstrom said yesterday. "Households can, however, reasonably anticipate that lower fuel prices will be the norm throughout the rest of this year and probably into early 2009."

The Federal Highway Administration reported this week that Americans drove 10.7 billion fewer miles in September than a year ago, the 11th straight monthly decline.

But there's some evidence that motorists may be heading back to the pump in greater numbers as gasoline prices fall.

MasterCard SpendingPulse reported on Tuesday that even though gas consumption last week was down 2.8 per cent from a year ago, it was the smallest year-over-year decline in more than two months.

In Ohio, where gas prices fell to an average of US$1.79 yesterday, Laura Duemey, a 48-year-old receptionist from Columbus, fuelled up her Hyundai XG350 sedan.

"It's awesome," Duemey said. "With this gas guzzler, there was no way I could afford to keep paying the way (prices) were going."

While there have been few good weeks on the New York Mercantile Exchange since crude peaked on July 11, the past week was particularly bad.

Gasoline futures plunged to a new low on Monday as Japan joined a number of European nations in recession. It was more of the same Tuesday and Wednesday. On Thursday, crude fell to levels not seen in three years.

Between Monday and yesterday, crude had lost 12 per cent of its value. Yesterday was the first time in six trading sessions that crude ended higher.

Light, sweet crude for January delivery rose 51 cents to settle at US$49.93 a barrel on the New York Mercantile Exchange. Earlier, in electronic trading, the price dipped to US$48.25, the lowest level since May 18, 2005.

In London, January Brent crude rose US$1.17 to settle at US$49.19 on the ICE Futures exchange.

Yesterday's activity reflected just how closely oil traders have gauged the mood in equities markets over the past several weeks.

Wall Street moved higher yesterday, with investors taking a breather from the heavy selling of recent days. Energy and utility stocks showed some advances.

It was a different story earlier in the week.

The Dow plunged on Thursday after the US Labour Department said new applications for jobless benefits exceeded analyst estimates and rose to the highest level of claims since July 1992 and investors grew even more leery about the health of the nation's biggest banks.

In a note to clients yesterday, Tudor Pickering Holt & Co Securities said economic concerns are clearly trumping any further production cuts by the Organisation of Petroleum Exporting Countries, which accounts for about 40 per cent of global supply.

Opec lowered production quotas by 1.5 million barrels a day last month, and some analysts predict even lower levels to come out of the cartel's next official meeting on Dec 17.

Such action "may not matter until folks have more visibility/comfort on (the) demand side," the Tudor Pickering note said.

Oil prices have been crushed as the global economic downturn has diminished demand.

How low prices can go is anyone's guess.

"Do not trust anyone in this market who tries to convince you that oil cannot go below US$40," Schork said in his report yesterday. "The same way no one had a clue how high prices could go last July, there is no telling how low we can go now." — AP

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