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BY DIRK LAMMERS
AP Energy Writer | Tuesday, January 13, 2009 | (1 comment(s))
SIOUX FALLS, S.D. | Falling crude demand in the world's largest consuming nation drove oil prices Monday to a new low for the year as the U.S. enters a corporate earnings season expected to be fraught with bad news.
The strained economy outweighed factors that would normally boost the market -- Mideast tensions, signs that OPEC was implementing large-scale production cuts, the ongoing Gazprom-Ukraine gas dispute and a winter season expected to deliver the coldest weather in a decade.
"It's amazing what the market's ignoring," said Phil Flynn, an analyst at Alaron Trading Corp. "That really tells you the story of how bearish this is."
Light, sweet crude for February delivery fell 8 percent, or $3.24, to settle at $37.59 a barrel on the New York Mercantile Exchange.
After 10 straight days in which prices rose, the average cost for a gallon of retail gasoline finally fell overnight, catching up to crude markets that began to give way a week ago.
"Clearly, the focus this morning is back on the macroeconomics, and the concern that the demand for oil is just not going to be there any time soon, and there's going to be plenty of oil out there," Flynn said.
The Department of Energy last week reported bigger than expected inventories of oil, natural gas and gasoline, suggesting demand for energy continues to erode.
Traders are buying crude and putting into storage in hopes that it will be worth more at a later date. Oil tankers are being leased at sea. Storage space for crude became very hard to find at a key delivery point when the January contract expired a few weeks ago as unwanted oil flooded the market.
The contract price spread is creating an enormous incentive to build inventory, said oil trader and analyst Stephen Schork.
"Little wonder then why overall crude oil supplies have since jumped to a 35-week high," Schork wrote in his daily publication, The Schork Report.
The Organization of Petroleum Exporting Countries, in an attempt to boost prices, has announced production cuts of 4.2 million barrels per day since September with the latest cuts going into effect at the beginning of the year.
Michael Lynch, president of Strategic Energy & Economic Research, said it takes four to six weeks for oil to transit on the market, so any bump from the latest cuts likely won't be felt until mid- to late-February.
"They will take effect, but not yet," Lynch said.
Demand for crude continues to be weak.
The nation's largest manufacturers have slashed spending on fuel and last week, aluminum producer Alcoa said it was cutting 13,500 jobs and making deep production cuts.
Alcoa, chip maker Intel and biotech company Genentech will report fourth quarter results this week, giving investors a glimpse of how deep the current recession may be.
Oil prices fell 17 percent last week, weighed by fears that rising U.S. unemployment will undermine crude demand.
The Labor Department said Friday that employers slashed 524,000 jobs in December and 2.6 million jobs for all of 2008. The nation's unemployment rate jumped to 7.2 percent, the highest since 1993.
Meanwhile, the national retail average price for a gallon of regular gas fell 0.2 cents to $1.79 a gallon overnight, according to auto club AAA, the Oil Price Information Service and Wright Express. That is about 13 cents a gallon above what it was a month ago and about $2.32 below last July when prices peaked at $4.11 per gallon.
Prices bottomed out at the end of 2008 around $1.61 a gallon.
Raymond James analyst Darren Horowitz said in an analyst note that while the recession is dominating short-term prices, Saudi Arabia's weekend announcement that it would cut oil output by about 300,000 barrels per day below its target may lend support in the long term.
There are signs that the Russia-Ukraine gas dispute could be nearing an end.
Gazprom, Russia's gas company, said that Ukraine signed a deal Monday to allow independent monitors to track natural gas supplies from Russia to Europe with no additional conditions. The agreement could open the way for a resumption of gas shipments to Europe through pipelines that cross Ukraine.
In other Nymex trading, heating oil futures slid 2.5 cents to settle at $1.4724 a gallon, while natural gas for February delivery rose 2.6 cents to setle at $5.542 per 1,000 cubic feet. Gasoline futures dropped 2.7 cents to settle at $1.0841.
In London, February Brent crude fell $1.51 to settle at $42.91 a barrel on the ICE Futures exchange.
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Elevated Observationist wrote on Jan 14, 2009 12:04 PM:
Someday you'll realize this and won't partake in the same exercises over and over again. One thing I've learned about these monoliths; they never change their gameplan - the tactics are always the same.
History does indeed repeat itself. "