Oil Below $40 on Fears of Weaker Crude Demand

By: AP
By: AP

VIENNA, Austria – Oil prices fell below $40 a barrel Tuesday, adding to a sharp drop overnight, on concerns that energy demand is evaporating in the face of a severe global economic slowdown.

Prices have fallen 73 percent since July on investor fears that massive job layoffs and plummeting consumer spending in the U.S. are weakening global oil consumption.

By noon in Europe, light, sweet crude for February delivery dipped 6 cents to $39.85 a barrel in electronic trading on the New York Mercantile Exchange.

"Fears of demand are dragging the price lower," said Toby Hassall, an analyst at investment firm Commodity Warrants Australia in Sydney. "You don't want to get in the way of a runaway train."

Overnight, the February contract fell $2.45 to settle at $39.91 a barrel after Toyota Motor Corp. and drugstore operator Walgreen Co. reported dismal news.

Walgreen's said profit fell 10 percent in its fiscal first quarter, while Toyota slashed its earnings forecast for a second time, warning that it now expects to post an operating loss for the fiscal year through March for the first time in 70 years.

The Dow Jones industrial average fell 0.7 percent Monday, the index's fourth straight day of losses. Oil investors have looked to stock markets as a barometer of sentiment in the economy.

"What we may have to see before oil prices really carve out a bottom is evidence that crude inventories have stopped rising or a sustained rally in equities," Hassall said. "The focus of the market has been almost purely on the demand side."

Hassall predicted prices could fall as low as $25 a barrel next year before rising to as high as $60 if the global economy recovers in the second half.

"Prices could dip into the 20s for a time, and then there will likely be fairly choppy, sideways action in the first quarter," Hassall said.

OPEC said last week it would slash production by 2.2 million barrels a day, its largest cutback ever, adding to a 1.5 million output quotas reduction in November in a bid to stem the rapid price decline.

Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said Sunday the group was willing to cut production as much as necessary to stabilize oil prices. Khelil also said the market needed time to absorb previous cuts.

"It will take time for output cuts to flow through, but there's some doubt about whether there will be full compliance," Hassall said. "I wouldn't be surprised if OPEC cut again in January or February. There's been quite a significant demand side deterioration."

Oil's downward curve is also dragging down gasoline prices and giving consumers a break at the pump just five months after gas prices peaked at $4.11 a gallon.

Noting that retail gasoline prices have fallen for the 23rd consecutive week since July 4, trader and analyst Stephen Schork said that as of Monday the national U.S. average was $1.653 a gallon.

"That is the lowest price at the pump in nearly five years, i.e. since February 2004," he wrote in his Schork Report.

Gasoline futures on the Nymex gained just over a penny to fetch 90 cents a gallon. Heating oil dropped 0.45 cent to $1.34 a gallon while natural gas for January delivery rose by close to 10 cents to $5.39 per 1,000 cubic feet.

In London, February Brent crude edged up 2 cents to $41.47 a barrel on the ICE Futures exchange.


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