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Oil makes a run at US$40 on stock market coattails

ENERGY prices rose on the coattails of broader financial markets yesterday as investors shook off more bad housing news and a dismal government report suggesting that consumer confidence is in free fall.

Light, sweet crude for April delivery staged a late-session rally to settle up US$1.52 at US$39.96 on the New York Mercantile Exchange. Oil prices have failed to settle above US$40 for more than two weeks and inventories of crude are surging toward record levels.

"Right now, it's all about the stock markets," said Phil Flynn, an analyst at Alaron Trading Corp. "A little pop on stocks means a little pop on oil. If things start looking bad, then we start looking down."

The Dow Jones industrials rose more than 200 points yesterday afternoon.

Consumers and businesses have slashed spending on energy and on Wednesday, the government is expected to report that U.S. inventories of unused crude continued to grow over the past week.

Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, said traders are watching large and building crude stockpiles, which have pushed crude prices close to five-year lows.

Economic data continues to suggest an economy with little room for spending on energy.

The Standard & Poor's/Case-Shiller U.S. National Home Price Index on yesterday showed home prices tumbled by the sharpest annual rate on record in the fourth quarter and in December. Prices are now at levels not seen since the third quarter of 2003.

"Seeing that the market was able to stay up in spite of that, there's a sense maybe some of the bad news is already priced in," Flynn said.

Months of dismal economic news, highlighted by massive job cuts, have weighed on the psyche of investors and undermined faith that the economy will recover in the second half.

Consumer confidence tumbled in February.

The New York-based Conference Board said yesterday that its Consumer Confidence Index, which was down slightly in January, plummeted more than 12 points in February to 25, from the revised 37.4 last month. That was well below the 35.5 level that economists surveyed by Thomson Reuters expected.

The index, which had hovered in the high 30s over the past few months, broke new lows since it began in 1967. A year ago, the consumer confidence reading stood at 76.4.

Even large output reductions by the Organization of Petroleum Exporting Countries have failed to boost prices. OPEC has slashed 4 million barrels a day from production and the group's leaders have said it's likely output will be cut again on March 15.

OPEC must slash production and allow crude inventories to slim down before prices stabilize.

And an inventory report to be released today by the U.S. Department of Energy is expected to show that crude inventories continue to grow, indicating that demand for energy has evaporated severely.

"The weekly U.S. inventory data is likely to show that crude supplies increased by one million (barrels)," wrote Addison Armstrong of Tradition Energy.

Analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., expect the demand picture to be even worse than that.

Ritterbusch said bigger than expected inventory numbers could drive oil prices to new lows.

In an indication of how far demand has fallen, storage facilities continue to fill up even though production from around the world is falling.

The latest official oil production figures from Mexico show output has deteriorated. Mexico's Pemex produced an average of 2.68 million barrels in January, a 9.2 percent year-on-year decline, Armstrong said.

Output at Mexico's most productive field since 1979, the giant Cantarell field, fell 38 percent.

In other Nymex trading, gasoline futures rose 4 cents to settle at US$1.0837 a gallon, while heating oil rose 3.3 cents to settle at US$1.2082 a gallon. Natural gas for March delivery gained 14 cents to settle at US$4.236 per 1,000 cubic feet.

Brent prices rose US$1.51 to settle at US$42.50 on the ICE Futures exchange in London.


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