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Oil falls below US$35 on more bad economic news

BENCHMARK oil prices fell below US$35 a barrel yesterday as another dose of bad economic news only raised concerns about the global downturn's impact on energy demand.

Economic expectations for the US were sharply downgraded by the Federal Reserve, which predicted that more people will lose jobs and the economy will contract.

Light, sweet crude for March delivery fell 31 cents to settle at US$34.62 a barrel on the New York Mercantile Exchange. The March contract expires on Friday, and most of the trading was for the April contract.

Benchmark crude for April delivery fell US$1.13 to settle at US$37.41.

There is little faith in the energy markets that the US$787 billion stimulus bill signed this week will lead to a quick turnaround.

There's just "a deafening lack of any fresh foundation for economic growth," the energy consultancy Cameron Hanover said in a note to clients yesterday.

"Many traders had hoped and expected progress on the stimulus bill would somehow solve the economy's worst woes and fears," the note said. "At this stage, it does not seem to have done that."

The Federal Reserve on yesterday projected the unemployment rate will rise to between 8.5 and 8.8 percent this year. The old forecasts, issued in mid-November, predicted the jobless rate would rise to between 7.1 and 7.6 percent.

The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent.

It also said production at the nation's factories, mines and utilities fell 1.8 percent last month, the third straight month for a decline. That means a huge cut back in energy demand.

Factories and utilities consume an enormous amount of natural gas. Natural gas prices this week fell to their lowest levels since September 2006.

Another report from the Commerce Department said construction of new homes and apartments plunged 16.8 percent in January from the previous month, to a seasonally adjusted annual rate of 466,000 units, a record low. Builders are slashing home construction as skyrocketing home foreclosures dump more empty properties on an already glutted market.

In an effort to prop up the economy, the White House on yesterday said the government will spend US$75 billion to help prevent millions of Americans from losing their homes.

But energy demand has already plummeted and US stockpiles of crude are hitting record levels.

Analysts expect crude stocks to grow by another 3.5 million barrels when the Energy Department releases oil inventory data for the week ended Feb. 13, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

After building to a record of nearly 35 million barrels, oil inventories at Cushing, Oklahoma - the delivery point for Nymex crude oil futures contracts - could climb further, Platts said.

Analysts also expect refiners to cut back even more as they try to match the steep decline in gasoline demand in recent months.

The American Petroleum Institute said yesterday overall demand for oil, as measured by domestic deliveries, was down in January from a year ago, though US gasoline demand registered its first monthly increase in more than a year. US gasoline demand rose 1.7 percent last month from a year ago, according to the monthly report from API, the oil and gas industry's trade organization.

Yet deliveries of distillate fuel oil, which includes diesel fuel, fell 3.5 percent, and jet fuel deliveries slipped nearly 9 percent.

"All told, weak demand across the board has given us the lowest deliveries for January in seven years," said API statistics manager Ron Planting.

Beyond worries about the US economy, Vienna's JBC Energy noted in its newsletter that "a slump in European stock indices and US automakers' demand for extra government funds added to the negative sentiment in the market."

General Motors Corp. and Chrysler LLC asked the government Tuesday for an additional US$14 billion in aid. GM presented a survival plan that also calls for cutting a total of 47,000 jobs globally and Chrysler said it will cut 3,000 more jobs.

GM, the world's largest automaker, said it could run out of money by March without new funds.

"That's 47,000 more people who will be driving less," said Gerard Rigby, an energy analyst with Fuel First Consulting in Sydney. "It's mind-blowing. It makes you wonder whether these companies should survive."

In other Nymex trading, gasoline futures slipped 5.66 cents to settle at US$1.0652 a gallon. Heating oil fell 4 cents to settle at US$1.1469 a gallon, while natural gas for March delivery slid about a penny to settle at US$4.203 per 1,000 cubic feet.

In London, the March Brent contract fell US$1.48 to settle at US$39.55 on the ICE Futures exchange.


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