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Oil falls below US$46 as Wall Street gives up gains

OIL prices fell yesterday as investors weighed early gains in the equity markets against signs of a deepening recession that could further eat away at energy demand.

Light, sweet crude for March delivery fell 74 cents to settle at US$45.73 on the New York Mercantile Exchange, thouch prices fluctuated throughout the day.

Michael Lynch, president of Strategic Energy & Economic Research, said the market is in a sort of shoulder period in which dour economic news continues to emerge and investors haven't yet seen the effects of the OPEC production cuts.

"You've got countervailing forces pulling people in both directions," Lynch said. "People are sort of jumping in and out accordingly."

Oil prices hit a low of US$45.25 before swinging as high as US$48.59 during a volatile trading delay.

Analyst Jim Ritterbusch said traders earlier in the day seemed to be focusing on a 100-point jump in the Dow Jones industrial average and a significant weakening in the US dollar. The Dow later gave up its gains.

"These are factors that tend to push some speculative buying interest into the long side," said Ritterbusch, president of energy consultancy Ritterbusch and Associates.

Yesterday's oil price swings come after it gained US$2.80 on Friday to settle at US$46.47, confounding some market experts by seemingly ignoring the fundamentals of high supply and low demand.

"From a logical point of view, there is no reason for spot Nymex crude oil to trade above US$40," analyst and trader Stephen Schork wrote in his daily publication, The Schork Report. "OPEC is cutting production because no one is buying their oil. And, given the dire global economic outlook ... that is not about to change."

Ritterbusch said the demand deterioration is live and well, but the market is moving more into a sideways trade with near-term prices likely swinging between the mid-US$30 range on the down side and the mid-US$50 to low-US$60 range on the high side.

"The weakness in demand has pretty much been digested into the pricing structure," he said.

Investors will be looking to US earnings results this week for signs of the economy's health. Hundreds of companies will issue reports including Procter & Gamble Co., Kimberly-Clark Corp. and Starbucks Corp.

Crude investors often use equity markets as a gauge of sentiment about the economy. Oil has fallen about 69 percent since peaking at US$147.27 a barrel in July, joining a steep decline in stock markets around the world.

A report on the energy market by Sucden Research in London also mentioned a downward revision by the International Monetary Fund to its 2009 growth forecast -- to be released tomorrow--as another reason for concerns regarding the global economy.

The US economy, the world's largest consumer of crude, will "get worse before it gets better," Vice President Joe Biden said Sunday, dampening expectations that a massive government stimulus package will quickly spur growth.

Congress is working on an US$825 billion plan -- about two-thirds new government spending and the rest tax cuts -- that proponents expect will create as many as 4 million jobs.

Oil-rich Norway yesterday announced a US$2.9 billion stimulus package of tax cuts and increased spending in an attempt to dampen the impact of the global financial crisis.

Norway has put aside more than US$286 billion in a fund invested abroad to avoid overheating the country's economy. However, the government can used more oil wealth in Norway when needed.

Finance Minister Kristin Halvorsen said Norway, a major oil exporter, already expected a downturn after years of strong economic growth fueled by high oil prices.

But "the financial crisis and the global economic downturn have intensified the turnaround," Halvorsen said.

Ecuador's state oil company said Friday that it is cutting this year's budget by 30 percent to US$3 billion because of lower oil prices caused by the global economic slump.

Petroecuador had been counting on an average price of US$85 a barrel in 2009 -- just about last year's average. Now they are budgeting for US$44. The current price for Ecuadoran crude is near US$25.

The head of the Italian oil company Eni SpA said Sunday that the turbulence in oil prices is unprecedented and is "extremely bad news" for the industry.

"Our sector is no stranger to cycles," Paolo Scaroni, chief executive of Eni, told a panel at the Global Competitiveness Forum. "But the turbulence we are currently experiencing _ with oil doubling in the nine months to July 2008 and then losing two-thirds of its value in the following six months -- is unprecedented."

The Organization of Petroleum Exporting Countries has announced 4.2 million barrels a day in production cuts since September, though investors have largely brushed them off.

Raymond James analyst J. Marshall Adkins said that while it's too early to gauge cartel members' full compliance with the cuts, recent reports estimate that OPEC's January production is tracking a 1.5 million barrel-per-day cut

That "implies a surprisingly high level of compliance" relative to OPEC's 2.2 million barrel-per-day goal for the month, he said in a research note.

Adkins said no one knows when demand will pick up, but when it does, OPEC will again begin to bump up against capacity limits. And it's unlikely that non-OPEC countries as a group will be able to deliver meaningful oil supply growth in the future, he said.

In other Nymex trading, gasoline futures rose less than a penny to settle at US$1.1531 a gallon. Heating oil fell 2.35 cents to settle at US$1.4270 a gallon while natural gas for February delivery rose 2.8 cents to settle at US$4.490 per 1,000 cubic feet.

In London, the March Brent contract fell US$1.41 to settle at US$46.96 on the ICE Futures exchange.


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