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Oil falls with little suggesting uptick in demand

THE promise of billions of federal stimulus dollars did little to sway energy markets this week, with pessimistic investors focused on dour economic news that signaled the world's appetite for energy will shrink further still.

Oil prices fell all but one day of the short trading week, including yesterday, as economists voiced growing concerns about deflation.

Benchmark crude for March delivery fell 54 cents to settle at US$38.94, on the New York Mercantile Exchange. That contract expired yesterday and there was a very low volume in trades.

Light, sweet crude for April delivery fell 15 cents to US$40.03 a barrel.

"People are scared," said Phil Flynn, an analyst at Alaron Trading Corp., who noted that gold prices rose above US$1,000 an ounce as investors looked for a safe place to put their money.

While Brent prices fell 10 cents to settle at US$41.89 yesterday on the ICE Futures exchange in London, it was still trading at a premium to US benchmark crude, which is used to formulate gas in a limited Midwest market.

Investors digested woeful economic news all week including disappointing earnings reports by J.C. Penney and Lowe's to end the week yesterday.

J.C. Penney Co. reported a 51 percent drop in fourth-quarter profit as customers sharply cut spending on clothing and other more discretionary items. The department store chain also projected a wider first-quarter loss than analysts had predicted.

Home improvement retailer Lowe's said its fourth-quarter profit dropped 60 percent after customers cut back on spending. Lowe's earnings forecast for this year was worse than expected.

Flynn expects oil prices to eventually drop well below US$30 a barrel in coming months as manufacturers cut operations and millions of laid off workers stop commuting to work.

"We're getting ready for a tailspin, but you just don't know what's going to happen," Flynn said. If it weren't for the new federal stimulus package and promises of further OPEC production cuts, "we'd probably already be there."

Trading on the Nymex has been erratic because of a influx of "dumb money" entering the market, analyst Stephen Schork said. Amateur investors are flocking to energy funds that have bet crude prices will eventually spike again.

"They're looking at the fact that crude went to US$150 a barrel a year ago, and its in the 30s today," Schork said. "They think it's going back up."

Oil prices jumped briefly on Thursday after the Energy Information Agency reported that crude inventories in US storage houses fell unexpectedly. But Newedge analyst Antoine Halff noted that the drop came mostly from the Atlantic Coast. Oil supplies in other areas continued to build as refineries cut back on gasoline production.

The inventory report "may actually be seen as profoundly bearish," Halff said, noting that demand on the East Coast has been shrinking in recent months.

Rising US joblessness continues to drag on demand amid the worst recession in decades. The Labor Department said Thursday that the number of people receiving unemployment benefits jumped to an all-time high near 5 million, while new jobless claims remain well above 600,000.

The Department of Transportation said motorists drove 3.8 billion fewer miles in December than they did a year earlier. The 1.6 percent fall in driving marks the 14th consecutive monthly decline.

The Organization of Petroleum Exporting Countries has pledged to cut 4.2 million barrels a day from production, and the group's leaders say they may go further when they meet on March 15.

But investors have so far brushed off OPEC supply cuts, sending prices down about 73 percent from a record 147.27 in July.

"What OPEC is encountering is a very significant drop in demand in the last six months," said Toby Hassall, an analyst with Commodity Warrants Australia in Sydney. "Another big cut might support prices, but they're mindful that they don't want a surge in prices to slow down a recovery."

In other Nymex trading, gasoline futures fell 2.4 cents to settle at US$1.0746 a gallon. Heating oil dropped less than a penny to settle at US$1.1967 a gallon, while natural gas for March delivery slid 7.6 cents to settle at US$4.01 per 1,000 cubic feet.


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