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Deteriorating US economy cuts off oil market rally

OIL prices plummeted more than 10 percent yesterday with little to suggest energy demand will recover in the deteriorating global economy.

Benchmark crude for April delivery fell US$4.61 to settle at US$40.15 a barrel on the New York Mercantile Exchange. In London, the price for Brent crude fell nearly 9 percent, or US$4.14, to settle at US$42.21 on the ICE Futures exchange.

Oil prices dipped below US$40 per barrel for the first time since a three-day rally last week. Prices began to fall Friday and the sell-off continued yesterday.

Michael Lynch, president of Strategic Energy & Economic Research, said the relentless influx of grim headlines is keeping downward pressure on the market.

"We had the run-up last week, but now people are looking at weaker demand signals and that's making them think we're going to need another round of cuts from OPEC," Lynch said.

OPEC has already slashed more than 4 million barrels a day from daily production, according to most estimates.

Pessimism in the energy markets grows stronger every time the government must step in to prop up a major U.S. corporation and the market is getting more of the same this week.

On yesterday, American International Group Inc. reported losses of US$61.7 billion in the fourth quarter, the largest quarterly loss in U.S. corporate history.

Late Sunday word began to arrive that AIG, once the world's largest insurer, would receive up to US$30 billion in additional federal assistance. The company has already been given US$150 billion in loans from the government, which now holds an 80 percent stake.

The Commerce Department said Friday that gross domestic product contracted 6.2 percent in the fourth quarter, the worst showing in a quarter-century.

And on yesterday, the Institute for Supply Management said the nation's manufacturing sector contracted for the 13th straight month in February, although at a slower pace than expected.

Crude is continuing to latch on to the stock markets, and the Dow Jones industrials dropped below 6,900 for the first time in more than 11 years.

"Anytime we get good economic news, we hit worse economic news," said Daniel Flynn, an analyst at Alaron Trading Corp. in Chicago.

Flynn said if current economic conditions linger, he could see oil prices hitting US$25 per barrel within a few months.

Analyst and trader Stephen Schork said the news doesn't promise to be any better this week with a February jobs report due out on Friday.

"Thus, from a macro viewpoint oil bulls are still fighting an uphill battle," Schork wrote in his daily publication, The Schork Report.

Raymond James analyst J. Marshall Adkins said falling U.S. petroleum demand and surging oil imports over the past six months have driven oil inventories at the main depot in Cushing, Okla., to the brim.

Those fundamentals, and the continuing global economic meltdown, prompted the firm to lower its 2009 oil price estimate to US$43 a barrel from US$60 a barrel.

"However, we expect U.S. oil imports to decline in the coming months in the wake of OPEC's large production cuts," Adkins wrote in an industry brief. "Recall that these cuts usually take 45-60 days to materialize in lower inventories.

Iran's Oil Minister Gholam Hossein Nozari said OPEC doesn't plan to cut production at its next meeting on March 15, state news agency IRNA reported Sunday.

Leaders of the Organization of Petroleum Exporting Countries have for weeks said the group would likely add to production cuts that have already been made.

The economies of Iran and other major oil producers are under severe strain and can only cut production so much before risking economic collapse.

Leaders of the 13-member cartel have said they would like prices to rise to US$70 a barrel.

In other Nymex trading, gasoline for April delivery tumbled 8.63 cents to settle at US$1.2862 a gallon, while heating oil fell 11.6 cents to settle at US$1.1512 a gallon. Natural gas for April delivery fell 4.6 cents to settle at US$4.152 per 1,000 cubic feet.


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