Oil prices fell below $34 a barrel Tuesday on the continued gloomy outlook for global energy demand and as traders sold the expiring benchmark contract due to a lack of space at a key U.S. storage facility.
The February contract expires Tuesday. Its last official settlement was $36.51 on Friday, as U.S. markets were closed Monday due to Martin Luther King Jr. Day. Nevertheless, electronic trading continued during the holiday and the February contract fell $1.96 to $34.55.
The February contract has fallen about a third in two weeks, in part because burgeoning supplies in Cushing, Oklahoma, the delivery point for the Nymex contract, have left investors with little space to store crude, forcing them to sell.
Traders say some oil firms are storing crude on rented tankers.
"There's too much oil in the world right now, and that oil is trying to find a home," said Stephen Corry, head of investment strategy for Merrill Lynch in Hong Kong. "We're finding surplus oil is being put in tankers ... and the price of future contracts is higher in order to offset the storage cost."
Sucden Research in London said that reportedly oil stored in tankers now amounted to about a day's worth of global demand.
Investors have turned their attention to the March Nymex contract, which is trading at $39.87 a barrel, down $2.70 from Friday's close.
In London, the March Brent contract was down 78 cents to $43.72 on the ICE Futures exchange.
Weighing on all the contracts is a severe recession in developed countries and a slump in global oil demand. Hundreds of U.S. companies report fourth quarter earnings this week, and investors are fearing the results could show the economic slowdown is deepening.
"The global economy remains the driver of oil so there's a lot of downward pressure," Shum said.
Despite March Nymex crude trading higher than the expiring February contract, investors were not optimistic the premium could be sustained for long.
Trader and analyst Stephen Schork said the current gloomy economic indicators in the United States — such as the rising jobless rate and falling industrial production — did not point to a quick recovery.
"Bottom line, we have high supply and low demand. Why should the March Nymex crude oil not trade below $40 ... or 30?" Schork wrote in his daily market comment.
Goldman Sachs said Monday the price of oil could fall below $30 a barrel in the short-term before rising to $65 in the fourth quarter.
Investors will also be eyeing the inauguration of President-elect Barack Obama on Tuesday for any hints regarding the government's economic and energy policies.
In other Nymex trading, gasoline futures fell 6.47 cents to $1.1025 a gallon. Heating oil dropped to 10.15 cents to $1.3719 a gallon while natural gas for February delivery slid 22.7 cents to $4.574 per 1,000 cubic feet.