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Oil falls on lower demand forecast

CRUDE, gasoline and other fuel prices tumbled yesterday after the government again lowered its forecast for global energy demand and said average oil prices for this year will likely be below current levels.

Light, sweet crude for April delivery fell US$1.36 to settle at US$45.71 a barrel on the New York Mercantile Exchange after closing at a two-month high Monday.

In London, Brent prices fell 17 cents to settle at US$43.96 on the ICE Futures exchange.

In early trading, oil looked like it would continue its winning streak that had boosted prices to nearly US$50 from US$33 earlier this year on comments from Federal Reserve Chairman Ben Bernanke. He told the Council on Foreign Relations that the U.S. recession could end this year if the government bail out succeeds and markets return to a more normal state.

The recession, now in its second year and already the longest in a quarter-century, has turned out to be more severe than the Fed had anticipated, he acknowledged in fielding questions after his speech.

Trading on Nymex market went negative almost immediately after the EIA cut its global demand for oil in 2009 by 200,000 barrels a day from its forecast last month. Its projection for global oil consumption this year is now 3 million barrels a day below its forecast from September.

"If economic growth in the United States and overseas rebounds sooner than expected, oil demand could experience stronger-than-expected growth and outpace production increases, leading to rising prices," the report said.

But any movement in higher prices will be muted by high inventory levels of oil among industrialized countries along with surplus production capacity by the Organization of Petroleum Exporting Countries, the report said.

Oil producers have slashed production globally, pulling up rigs and shutting operations as a worldwide economic downturn saps demand for energy.

The EIA report forecasts average oil prices of US$42 per barrel for 2009 and US$53 in 2010. Gasoline prices should average US$1.96 a gallon this year and US$2.18 next year.

The report was the first of several that will released over the several days that will influence energy prices.

The American Petroleum Institute will release its U.S crude inventory expectations later yesterday and on Wednesday, the Paris-based International Energy Agency will release its forecast for global demand.

Also on Wednesday, the U.S. government will release crude inventory levels, which have finally begun to decline from near capacity.

Analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., expect that the government will report that inventories of both crude and gasoline declined last week.

"Assuming crude imports steadied out at about 9 million barrels per day with no change in refinery inputs, there will likely be another drop in commercial crude stocks," said Linda Rafield, Platts senior oil analyst.

If forecasts for oil demand are weak, "That may dampen some of the enthusiasm we've seen the past couple of days," said Phil Flynn of Alaron Trading. It could serve as a "reminder what we're not out of the muck just yet."

Oil has been getting more resistance as it nears US$50, said analyst and trader Stephen Schork, who contends oil has been moving in a range from US$35 to US$50.

"Traders will continue to do that until when? When it stops working," he said.

Oil benefited early from a strong rally that eventually pushed the Dow Jones industrial average up 340 points yesterday afternoon.

Traders are watching to see whether the OPEC, which produces 40 percent of the world's crude, cuts output quotas when it meets Sunday in Vienna.

OPEC could announce fresh production cuts of between 500,000 and 1 million barrels a day, said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore.

"If the cut exceeds expectations, there would be a short-term pop in prices," Chu said. "But it will take months for the cut to affect supplies in the U.S. It's not an overnight thing."

In other Nymex trading, gasoline for April delivery fell 3.7 cents to settle at US$1.2972 a gallon and heating oil fell 1.67 cents to settle at US$1.1987 a gallon. Natural gas for April delivery fell 17 cents to settle at US$3.84 per 1,000 cubic feet.


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