Oil below $43 on record economic lows
A record US economic contraction dragged oil prices below $43 a barrel after a surge in crude just a day earlier on evidence that protracted weak US demand could be recovering.business Updated: Feb 27, 2009 21:33 IST
A record US economic contraction dragged oil prices below $43 a barrel on Friday after a surge in crude just a day earlier on evidence that protracted weak US demand could be recovering.
Thursday's bullish crude price path turned bearish as reports by the Commerce Department showed the economy shrank by 6.2 per cent in the last quarter of 2008 a 26 year record low.
Benchmark crude for April delivery slid $2.42 cents to $42.87 a barrel by midafternoon in Europe on the New York Mercantile Exchange. The contract jumped $2.72 on Thursday to settle at $45.22. The Commerce Department report released Friday showed the economy sinking much faster than the 3.8 per cent annualized drop for the October-December quarter first estimated by the government last month. It also was considerably weaker than the 5.4 per cent annualized decline economists expected.
Looking ahead, economists predict consumers and businesses will keep cutting back spending, making the first six months of this year especially rocky.
In the fourth quarter, consumers cut spending at a 4.3 per cent pace. That was steeper than the initial 3.5 percent annualized drop and marked the biggest decline since the second quarter of 1980. The new report offered grim proof that the economy's economic tailspin accelerated in the fourth quarter under a slew of negative forces feeding on each other.
The faster downhill slide in the final quarter of last year came as the financial crisis the worst since the 1930s intensified. A stronger drop in crude prices was prevented by Wednesday's report of lower than expected supply increases in both oil and gasoline futures.
Government data earlier this week showed that gasoline demand was up 1.7 per cent from the same period last year.
"Most of the strengthening demand development can be attributed to lower pump prices, which has encouraged more driving," said Vienna's JBC Energy.
The US Energy Department on Wednesday said crude inventories rose 700,000 barrels for the week ended Feb. 20, less than the 3.5 million barrel build-up analysts expected. While inventories rose, the trend appears to be slowing. Last week the government reported inventories fell slightly.
Dismal economic news reflecting the worst recession in decades still weighs on oil prices. The government reported Thursday that new jobless claims rose again and the number of Americans continuing to receive unemployment benefits has topped 5.1 million. The Labor Department said first-time requests for unemployment benefits jumped to 667,000 from the previous week's figure of 631,000.
"There's probably too much bad economic news out there to let prices break out," said Gerard Rigby, an energy analyst with Fuel First Consulting in Sydney, Australia.
OPEC will likely announce a production cut of about 1 million barrels a day at the group's next meeting on March 15, adding to 4.2 million barrels a day of output reductions the 13-member cartel has pledged since September, Rigby said.
Leaders of the Organization of Petroleum Exporting Countries have said recently they would like oil to trade near $70 a barrel. "If oil stays in the $40s, I think they'll cut again, but if the market goes above $50, they may not do much," Rigby said. "I think they'd like to see a minimum of $60."
Oil prices fell 78 per cent to $32.70 a barrel in December from a record $147.27 in July, and for the last couple months, crude has traded in a range between $35 and $45. Investors who use technical analysis to follow trading trends say oil may be poised to trade higher.
In other Nymex trading, gasoline futures fell 7 cents to $1.24 a gallon, while heating oil slid 4 cents to $1.25 a gallon. Natural gas for March delivery dropped 1 cent to $4.07 per 1,000 cubic feet. Brent prices fell $1.68 cents to $44.83 on the ICE Futures exchange in London.