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Oil falls below $40 on persistent demand fears

Oil fell below $40 a barrel on persistent fears about energy demand after a big rise in US unemployment renewed worries about the global economy.

business Updated: Jan 12, 2009 13:09 IST
Fayen Wong

Oil fell more than $1 to below $40 a barrel on Monday, extending the previous session's 2 per cent loss, on persistent fears about energy demand after a big rise in US unemployment renewed worries about the global economy.

The decline came despite news that OPEC kingpin Saudi Arabia plans to cut oil output to below its agreed OPEC target, supply disruptions in Europe from the Russia-Ukraine gas dispute and tensions in the Middle East.

US light crude for February delivery fell $1.05 to $39.78 by 0654 GMT, adding to Friday's 87-cent loss. London Brent crude fell 32 cents to $44.10.

Oil's fall on Friday came after a US government report showed employers slashed jobs by 524,000 in December, driving the national unemployment rate to its highest level in almost 16 years.

"The market is also keeping an eye on other developments in OPEC, Europe and tensions in the Middle East, but the consumption worry is still a big bear," said David Moore, a commodities strategist at the Commonwealth Bank of Australia.

Oil prices fell 54 per cent last year and have shed more than $100 from a record peak of above $147 a barrel last July as the global economic downturn hits demand for fuel.

The world's top oil exporter, Saudi Arabia, plans to cut output by up to 300,000 barrels per day (bpd) below its agreed OPEC target, a proactive step to prop up a collapsing market, industry sources said on Sunday.

The OPEC kingpin has already lowered supply this month to 8 million bpd, meeting its target under OPEC's pact to reduce overall supplies by a record amount from January 1.

Saudi Arabia's cutbacks add to similar moves earlier this month by other OPEC producers including Iran, the United Arab Emirates, Kuwait and Libya to curb supplies, although evidence that oil producers were cutting output has not lent much support to prices so far.

But Iran's representative to OPEC was quoted as saying that the cartel could decide to reduce oil output again at its meeting in March if crude prices fall further.

Analysts noted that the forward curve for crude prices was in a contango, with March futures hovering around $46 a barrel, on speculation that the OPEC cuts will eventually start to impact the market and support prices.

Separately, a deal to restore Russian gas supplies via Ukraine to Europe appeared on the verge of collapse after Moscow rejected additions by Kiev as a 'mockery of common sense'.

And in the Middle East, Israel leaders trying to find a knockout blow for Hamas militants defying a 17-day-old assault have thrown army reservists into the battle.

Although the Russian-Ukrainian gas price row and Middle East tensions could help push oil prices higher, analysts said any rebound was expected to be short lived.

"We believe that the upside drivers that drove prices from a low of $33 per barrel to a high of over $50/bbl in the past few weeks were mostly perceived or transient and do not create the foundation for a sustainable recovery in prices," Goldman Sachs Commodities said in a research note on Friday.

Goldman Sachs added that ongoing market surplus is expected to continue to drive inventories higher and put pressure on its forecast oil price of $30 a barrel for the first quarter of 2009.