Monday, December 22, 2008

Oil falls again

Oil prices fell Monday as investors carried on last week's tradition of falling prices leading up to the Christmas holiday, and the dollar earned back early losses against the euro.

U.S. crude fell $1.02 to $41.34 a barrel on the first weekday of trading for the February 2009 contract. The market will be closed on Christmas Day, Thursday.

Oil, like other commodities, is traded in dollars, so if the dollar declines in value, crude becomes cheaper for foreign investors, which spurs buying. The dollar was down slightly against the 15-nation euro in early trading, but had recovered to near zero by noon.

The January contract, which sank below $40, drew to a close last week. The February contract became the front-month contract, with prices above $40 a barrel.

Falling demand: Last week the market all but ignored a pledge from the Organization of Petroleum Exporting Countries, measures by the Federal Reserve to prop up the ailing economy of the United States - the world's largest oil consumer - and a bailout of the U.S. auto industry.

"This is a market that still needs to see proof of demand," said Phil Flynn, senior market analyst with Alaron Trading in Chicago.

Falling oil demand due to the global economic slump has been the oil market's main concern since this summer. Crude prices have fallen more than $100 a barrel from a record high of $147.27 a barrel on July 11.

The Fed, under pressure to strengthen the U.S. economy, cut a key interest rate last week Tuesday to an unprecedented range between 0% and 0.25%. In response, oil prices fell 91 cents.

Oil income is starting to dry up in many oil producing countries. In order to bolster prices, OPEC, whose members produce about 40% of the world's oil, pledged Wednesday to cut production by 2.2 million barrels a day. But oil prices fell $3.54 a barrel as investors speculated the group may not be able to keep its quotas.

And on Friday, the federal government announced that it would provide $13.4 billion in loans to General Motors (GM, Fortune 500) and Chrysler, which could keep them out of bankruptcy through March. But crude prices sank again, shedding $2.35 a barrel.

"People realize that that's only a band-aid," said Flynn.

Volatility ahead: With the shortened trading week, oil prices could fluctuate wildly. Trading halts on Thursday for Christmas, and then resumes on Friday before the weekend.

Swings in the market are often amplified when fewer market participants are present. So even a modest amount of buying or selling could turn more substantial price movements.

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