Tuesday, January 27, 2009

Oil falls $4 amid economic jitters

Oil prices fell more than $4 a barrel Tuesday as worries about a recovery in demand took center stage amid heightened concern that the global recession will continue to drag on.

That feeling was exacerbated by two dismal economic reports out of the United States, the world's largest oil consumer.

By the end of trading, U.S. crude for March delivery had fallen $4.15 to $41.58 a barrel. Falling demand due to the slowing economy has caused oil prices to plummet more than $100 a barrel from a record high of $147.27 a barrel last July.

A turnaround in demand won't occur "until we start seeing an economic expansion in the United States," said Rachel Ziemba, energy analyst with RGE Monitor in New York.

The Labor Department reported a large spike in unemployment in December, and another closely watched report from a private research firm showed consumer confidence sank to an all-time low in January.

Furthermore, stockpiles continue to build in the U.S. so even when demand returns, it may be some time before those get worked off.

Analysts expect the government to show a 3.4 million barrel increase in U.S. crude stocks when it releases its weekly statistics on Wednesday, according to a poll from research firm Platts.

Investors will be keeping a close eye on the $825 billion economic stimulus plan being debated by Congress. However, even if the stimulus plan boosts the economy, oil prices may not start to pick up until at least 2010, Ziemba said.

OPEC cuts: In order to cope with an oversupply of crude oil, the Organization of Petroleum Exporting Countries, an international trade group whose members produce about 40% of the world's oil, pledged last year to cut production in January by 2.2 million barrels a day.

However, as a group, OPEC is notorious for falling short on pledged production cuts.

"They're never really going to lower production to quota levels," said Jim Ritterbusch, president of oil advisory firm Ritterbusch and Associates in Galena, Ill. But he added that "they've done a better job of cutting than I thought they would."

Gas prices: By Tuesday, gasoline retailed at a national average of $1.84 a gallon, down 0.2 cents from the day before, according to a daily survey from motorist group AAA.

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