Oil Dips Below $40 over World Economic Concerns

VIENNA, Austria – Resurfacing concerns over the world economy sent crude prices lower Tuesday, eclipsing fears that the conflict between Israel and Hamas could inflame tensions in the oil-rich Middle East.

Prices have blipped upward over the past few days because of the fighting. But with the conflict in its fourth day Tuesday, the market refocused on the turmoil roiling economies internationally — and the negative fallout for oil demand.

Light, sweet crude for February delivery fell 74 cents to $39.28 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. The contract overnight rose $2.31 to settle at $40.02.

Hamas sent missiles deep into Israel on Monday, three days into Israel's punishing air offensive in Gaza. Four Israelis, including a soldier, were killed and eight wounded. Palestinian health officials put the three-day death toll in Gaza at 364; the U.N. said the total included at least 62 civilians.

Early Tuesday, Israeli aircraft dropped at least 16 bombs on five Hamas government buildings in a Gaza City complex, destroying them, witnesses said. Israel's defense minister Ehud Barak promised a "war to the bitter end against Hamas" and allied militants.

Crude prices have rallied 14 percent since Friday on concerns that the conflict could heighten tensions between Middle East oil power Iran and Israel and the U.S., said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore.

"The danger is Iran getting involved," Kornafel said. "Any tension in the Middle East is going to involve the whole region."

"This problem isn't going to go away overnight. It's been a big disaster."

Still, expectations that a slowing global economy will dampen crude demand have helped contain the rally in oil prices. If the Israel-Gaza conflict doesn't escalate, prices could break below $30 during the next few months, Kornafel said.

"I don't expect any positive surprises for GDP, housing data, jobless claims, or manufacturing data," he said. "It's all going to be negative for at least the next couple months."

Oil prices have fallen 73 percent since peaking at $147.27 a barrel on July 11 — and with them the cost of derived products such as heating oil and gasoline. That is welcome news for consumers worldwide in otherwise gloomy economic circumstances.

At U.S. pumps, "gasoline fell for the twenty-fourth week since the 04th of July holiday," wrote trader and analyst Stephen Schork, in his Schork Report. "As of Monday, prices in the U.S. fell by 4 cents ... to a national average (of) $1.613 a gallon.

"That is the lowest price at the pump in nearly five years, i.e. since the week ended January 19th, 2004!"

Gasoline futures fell by more than a penny Tuesday on the Nymex, fetching 86 cents a gallon, while heating oil was basically flat at $1.28 a gallon. Natural gas for February delivery was down by 2.5 cents at $6.06 per 1,000 cubic feet.

In London, February Brent crude fell 24 cents to $40.03 a barrel on the ICE Futures exchange.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months, with Libya on Tuesday becoming the latest member to announce it is complying.

In announcing the reduction, National Oil Corporation head Shukri Ghanem said the latest cuts would bring Libya's total output reduction to 270,000 barrels per day from September levels. That is about 20,000 barrels more than the country is required to cut under its OPEC quota.

However, investors are skeptical the 13-nation group will adhere to the new output quotas.

"The market is looking for compliance," Kornafel said. "OPEC needs to show they are sticking to these very pronounced cuts they've already announced."


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