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Crude prices above US$40 with all eyes on stimulus package

OIL prices rose yesterday as traders weighed production cuts by OPEC against a deteriorating global economy that they expect to push demand, and prices, even lower.

There was some encouraging news from the housing sector, which helped boost confidence on the New York Mercantile Exchange, where traders looked to Washington for clues about the pending US$885 billion stimulus plan.

Light, sweet crude for March delivery rose 70 cents to settle at US$40.78 a barrel on the New York Mercantile Exchange.

Production cuts by OPEC may be all that is supporting prices right now, but supply issues no longer dominate the market as they once had. Falling demand will push crude closer to the US$30 range, said Addison Armstrong, director of market research at Tradition Energy.

"We have really bleak prospects for our economy right now," Armstrong said.

The Organization of Petroleum Exporting Countries promised last year to cut crude production by 4.2 million barrels a day. OPEC in the past has cheated on announced production cuts to keep oil money flowing, but so far that hasn't happened to the degree that was expected, Armstrong said.

Still, signs that the world's biggest economies are struggling means that demand for oil will weaken, he said.

China reported Monday that some 20 million workers have lost their jobs, while Hong Kong-based brokerage CLSA published a survey that said Chinese manufacturing shrank in January for the sixth consecutive month.

The same thing is happening in the US. The government recently reported that the economy slowed nearly 4 percent last year and that that slide could accelerate at the beginning of this year.

That has led to growing inventories of unwanted crude with industries cutting production and drivers cutting their miles on the road. A report yesterday by the American Petroleum Institute, the industry's trade association, is expected to show that oil stocks rose 2.9 million barrels last week, according to the average of estimates in a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.

US Energy Department's Energy Information Administration reports its inventory data on Wednesday.

The data is expected to show that US crude inventories rose by 2.5 million barrels in the week ending January 30, according to a Thomson Reuters poll of analysts.

Oil stocks have grown more than 20 million barrels in the last four weeks, evidence the nation's worst recession in more than 25 years may be deepening.

Refiners are buying much less crude with demand for their products like gasoline falling. That has led to rising gas prices even with the price of oil near five-year lows.

A proposed strike by the United Steelworkers Union last week would have put more refineries offline. But the union said yesterday it had reached a tentative labor agreement with the oil industry and called off the proposed strike.

"We certainly didn't want to contribute to the economic struggles of the American public by calling a national strike and possibly seeing the spiking of gas and diesel prices, home foreclosures of our members, or any other hardships," USW International Vice President Gary Beevers said in a statement.

Traders appeared eager for any positive economic news and on yesterday it came from an unlikely source: the housing sector.

The National Association of Realtors said buyers stepped in to snap up properties at steep discounts in December, especially in the South and Midwest. Its seasonally adjusted index of pending sales for preowned homes rose 6.3 percent to 87.7 in the final month of the year from an upwardly revised November reading of 82.5.

Real estate data, and news from almost every sector of the economy, have pushed crude prices lower now for seven months.

Oil prices have fallen about 72 percent since peaking at US$147.27 a barrel in mid-July as a financial crisis in the US subprime mortgage sector mushroomed into the worst world economic slowdown in decades.

Many analysts think it will get worse before it gets better, meaning the price for crude will remain depressed.

"I think the world is underestimating the power of this recession," said Christoffer Moltke-Leth, head of sales trading for Saxo Capital in Singapore. "It's still unfolding. It could be really, really ugly."

Moltke-Leth said he expects oil to fall to as low as US$28 a barrel by the end of March, as the US - the world's largest crude consumer - continues to struggle.

Millions have lost their jobs in the US, and spending on gasoline and cars has tumbled.

Chrysler LLC sales chief Steven Landry said yesterday that US industry sales could drop as much as 35 percent in January to the lowest rate in 25 years. General Motors Corp. said it will offer buyouts to all of its hourly employees as the troubled automaker continues to slash costs.

The Federal Reserve on yesterday extended key programs intended to relieve the credit and financial problems that have deepened the recession. The central bank says it is taking the action "in light of continuing substantial strains in many financial markets."

In other Nymex trading, gasoline futures rose 1.78 cents to settle at US$1.1670 a gallon, while heating oil fell 1.7 cents to settle at US$1.3254 a gallon. Natural gas for February delivery fell 4.4 cents to settle at US$4.513 per 1,000 cubic feet.

In London, the March Brent contract rose 26 cents to settle at US$44.08 on the ICE Futures exchange.


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