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Crude prices fall below US$34 for the first time this year

OIL prices flirted with five-year lows yesterday as unemployment benefit claims rose and OPEC cut demand expectations for 2009.

Any belief that energy prices had bottomed out were wiped away early in the day as crude plumbed new depths for the year and more government data suggested the economy may be worsening.

"The bull oil era is officially over," said Phil Flynn, an analyst at Alaron Trading Corp.

Light, sweet crude for February delivery fell 5 percent, or US$1.88, to settle at US$35.40 a barrel yesterday on the New York Mercantile Exchange. Prices fell as low as US$33.20 yesterday and only gave up steep losses when the Dow Jones industrial average rebounded.

An oil industry report yesterday showed just how much energy use eroded over the past year.

For all of 2008, US petroleum deliveries - a measure of demand - fell 6 percent to 19.4 million barrels a day, with declines for all major products made from crude, according to the American Petroleum Institute.

That trend appears to be ongoing this year, with millions now out of work and bad jobs data continuing to roll in.

The Labor Department reported first-time requests for unemployment insurance jumped to a seasonally adjusted 524,000 in the week ending Jan. 10. Analysts had expected 500,000 new claims.

An analyst with the Labor Department said the increase is partly due to a flood of requests from newly laid off people who delayed filing claims over the holidays.

"It was very predictable that January was going to be ugly, but I'm not sure if anyone thought it would be this ugly," said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.

Kloza said trucking companies have seen a huge drop in business as orders dry up, just one example of how demand for energy has fallen away.

OPEC lowered its energy demand forecast for 2009, with investors already shrugging off production cuts of 4.2 million barrels a day by member countries. The Organization of Petroleum Exporting Countries said in its January report that it expects world demand for crude will fall 180,000 barrels per day in 2009, compared with the previous year.

Sustained job losses, bankruptcies and massive government bailouts have drowned out news of OPEC supply cuts that just six months ago would have sent crude prices soaring.

"I don't think there's anything they can say at this point," said analyst Stephen Schork, who doesn't expect a sustained rally in oil prices during the first half of this year.

"They didn't have control of oil prices when it was on the way up," he said. "They don't have control of it when it's on the way down."

Flynn said oil prices should rise as trading moves to the higher March contract, simply because those supplies do not have to be delivered for more than a month.

US oil inventories have been rising for months, an indicator that the recession severely cut into energy demand. The Energy Information Administration said Wednesday that crude inventories grew by 1.2 million barrels for the week ended Friday after jumping 6.7 million barrels the previous week.

According to the EIA, gasoline inventories rose by 2.1 million barrels and distillates increased by 6.4 million barrels.

On yesterday, the government reported that the draw on natural gas inventories was less than expected, suggesting that industry is pulling back production sharply and using less energy.

Refineries are cutting back production because profit margins are next to nil.

Storage facilities could be flooded with crude as the February contract comes to a close Tuesday, leaving little excess capacity.

"We're running out of places to put it," he said. "There's more oil out there now than we've had in a long time."

Crude prices jump in the next month's contract by about US$8 per barrel, suggesting how little room there is to take delivery. Crude levels at Cushing, Oklahoma, the delivery point for Nymex are at five-year highs.

Even if oil prices rebound, it will likely be short-lived if there is no sign of an economic recovery soon.

"We need something showing that people are being active again, that the job losses have stopped," Flynn said. "It's all well and good to give money to the auto industry, but if we don't sell cars, it doesn't help."

He expects oil prices to move toward US$25 a barrel.

In London, the February Brent crude contract fell 39 cents to settle at US$44.69 a barrel on the ICE Futures exchange.

In other Nymex trading, gasoline futures rose less than a penny to settle at US$1.1742 a gallon. Heating oil rose 2.4 cents to settle at US$1.4871 a gallon while natural gas for February delivery fell 12.7 cents to settle at US$4.843 per 1,000 cubic feet.


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