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Oil falls on employment report worries

OIL prices sank below US$41 a barrel yesterday as the government reported that US employers slashed more than a half million jobs last month, the most in 35 years.

Light, sweet crude for March delivery dropped a dollar to settle at US$40.17 a barrel on the New York Mercantile Exchange.

Crude prices traded as low as US$38.60 a barrel earlier in the day while investors digested a government report that said 598,000 jobs were lost in January. The Labor Department report also said unemployment rate rose to 7.6 percent, the highest since 1992.

Oil traders see layoffs as an instant drag on oil demand. People have less need for gasoline when they no longer have a daily commute. They also stop buying toys, nonstick pans, raincoats and millions of other products that are made with petroleum.

"The economy's ugly, analyst and trader Stephen Schork said. "We know it's ugly."

Schork said he expects traders will eventually push crude prices back to the US$50 range. For the past few weeks, crude oil hasn't found much interest when the price per barrel drops below US$40.

"You get the sense the market wants to go higher," he said. "Those who sell at US$40, they're going to get tired of doing that. Eventually they're going to hop on board and push this thing to US$50."

For all of 2008, the US economy lost a net total of 2.9 million jobs, according to revised figures. That marked the biggest annual loss on record and was worse than the 2.6 million initially estimated last month.

Many more are likely to come. Chrysler LLC said yesterday it will temporarily close four assembly plants next week because of weak US sales. Spokesman Max Gates said additional closures are possible because the company reviews its production schedules every week.

The jobless numbers capped another rough week that saw major losses at companies such as Motorola Inc. and Walt Disney Co. The Energy Department also reported that crude oil supplies continue to expand with millions of barrels of cheap surplus crude.

Amid the gloom, some companies are performing above analysts' beaten-down expectations. Wal-Mart's sales beat Wall Street's forecasts and Macy's department store, which this week said it would slash 7,000 jobs, raised its fourth-quarter and full-year forecasts.

Oil traders also are watching for possible further production cuts by the Organization of Petroleum Exporting Countries, which has already promised to reduce output by 4.2 million barrels since September.

So far the cuts haven't noticeably depleted crude inventories on the West Coast, a region that's heavily dependent on OPEC for oil, Newedge analyst Antoine Halff said in a research report.

Halff said it is possible OPEC's influence has faded on the West Coast because imports from Ecuador might not have been cut as expected. Also, supertankers carrying Saudi Arabia's reduced shipment may still be making their way across the Atlantic, and West Coast inventories may be receiving increased amounts from other foreign sources like Canada, he said.

Whatever the reason, "OPEC restraint is not making a dent on West Coast stocks yet," Halff said.

If current production cuts don't boost demand as hoped, OPEC leaders may slash production targets again at the group's meeting in March.

In other Nymex trading, gasoline futures fell 2.41 cents to settle at US$1.2507 a gallon. Heating oil dropped 0.74 cent to settle at US$1.3598 a gallon, while natural gas for March delivery rose 13.2 cents to settle at US$4.774 per 1,000 cubic feet.

In London, the March Brent contract gave up 25 cents to settle at US$46.21 on the ICE Futures exchange.


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