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IEA predicts first back-to-back annual declines in oil demand; crude sinks again

BURGEONING crude inventories pushed oil prices lower yesterday with yet another major energy group predicting demand will fall again this year in a widening recession.

In its closely watched monthly survey, the Paris-based International Energy Agency cited "the relentless worsening of global economic conditions" as it reduced its global demand expectations by 1 million barrels, to 85.3 million barrels a day.

It would mark the first time in more than a quarter century that global demand fell in consecutive years.

"This is more than just your average bear market," said Michael Lynch, president of Strategic Energy & Economic Research. "There's so much pent up inventory in terms of cars, houses, industrial equipment. It's going to take a long time to get out of this."

The Organization of Petroleum Exporting Countries and the US Energy Information Administration also cut their demand expectations this week. OPEC said crude demand should fall by 180,000 barrels per day this year. The US Energy Information Agency, part of the Energy Department, was much more pessimistic, projecting that oil consumption would fall by 800,000 barrels per day.

Light, sweet crude for March delivery fell 97 cents Friday to settle at US$42.57 on the New York Mercantile Exchange. The February contract, which expires Tuesday, rose US$1.11 to settle at US$36.51 a barrel in very light trading.

The February contract tumbled from a high of US$50.47 a barrel last week as dismal economic and corporate results stoked investor fears that a drop-off in crude demand may be greater than expected.

Bad economic news has continued to arrive daily, giving plenty ammunition to market bears who see energy demand continuing to fall at least through 2009.

The Federal Reserve said yesterday that industrial production plunged in December at twice the rate that analysts expected, with output falling 2 percent. The dismal showing underscored the heavy toll the housing, credit and financial crises are taking on the nation's manufacturers.

Pfizer Inc., the world's No. 1 drugmaker by revenue, was expected to lay off as many as 2,400 salespeople, according to published reports on Friday. Pfizer declined to comment on reports by Bloomberg News and the Wall Street Journal.

Fewer jobs, less production and little hope of economic growth has led to huge builds in US crude inventories.

Traders unable to get rid of crude are selling at a huge discount as storage facilities fill up with unwanted oil and gas, said analyst Stephen Schork.

Those lucky enough to find unused storage facilities are holding their oil in hopes of cashing in on the higher March prices. But those prices could evaporate quickly, Schork said.

"Who the heck wants to buy right now?" Schork said. "If you've got barrels, you're going to sit and wait and wait and wait."

The uptick in February oil prices suggests there are still buyers out there who can either move crude or have found a rare storage facility. Still, Schork doesn't expect industrial demand to perk up before the fourth quarter of 2009, and crude prices in March could suffer a worse fate than February, dropping below US$30 a barrel, he said.

Nevertheless, the federal government has pressed on with plans for widespread oil and gas drilling off both the Pacific and Atlantic coasts. An Interior Department proposal issued Friday calls for new drilling sites to be leased within five to six years.
Houston-based Baker Hughes Inc. also reported yesterday that the number of rigs actively exploring for oil and natural gas in the United States dropped by 21 this week to 1,568. Of the rigs running nationwide, 1,235 were exploring for natural gas and 324 for oil. Nine others were listed as miscellaneous.

The fall off in energy usage comes on the heels of unprecedented demand erosion in 2008.

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

Plunging demand has grounded oil prices for the past several months, with investors ignoring promises by the Organization of Petroleum Exporting Countries to slash 4.2 million barrels a day in crude production. The wild card is oil producers outside OPEC - whether they increase output and if so, how much that will compensate for reduced supplies from OPEC nations.

Noting that Moscow planned to lower the duty on oil exports, Vienna's JBC Energy said: "As this will increase the profitability of exports, Russia could ship higher volumes in February."

In other Nymex futures trading, gasoline slipped by less than a penny to settle at US$1.1672 and heating oil fell 1.3 cents to settle at US$1.4734 a gallon. Natural gas for February delivery fell less than a penny to US$4.797 per 1,000 cubic feet.

Brent crude for March delivery rose US$1.88 to US$46.57.


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