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Oil prices slump to start the week

ENERGY prices fell yesterday, a day before major first-quarter corporate results begin to arrive. Those reports will provide hints about the state of the economy and whether there will be a rebound in energy prices for businesses and consumers alike.

Benchmark crude for May delivery fell nearly 3 percent, or US$1.46 to settle at US$51.05 a barrel on the New York Mercantile Exchange.

With no major economic reports released, crude markets followed Wall Street, which sold off early following apparent collapse of IBM Corp.'s US$7 billion acquisition of Sun Microsystems Inc. late Sunday.

There are also the job losses outlined in the latest government report last week.

Many of those job cuts were in energy intensive industries, noted analyst and trader Stephen Schork.

U.S. manufacturers cut 161,000 jobs, and a million Americans have lost jobs in factories over the past six months. The construction industry has trimmed 126,000 jobs.

That means there is much less money being spent on oil, natural gas, and gasoline as companies cut back on production and fewer people drive to work. On Wednesday, the government will release its latest oil inventory report which has shown growing stocks of unused crude and gasoline.

Payrolls have be reduced at such a rapid pace, some believe that the economy may have already bottomed out, and that with production of oil and natural gas plunging, there could be a very strong bounce back for energy prices.

Crude has jumped from below US$35 a barrel in February as investor concerns have eased that the ailing U.S. economy would enter a depression and drag the rest of the world with it.

Whether or not the worst of the economic downturn is past, many analysts believe energy prices have risen too fast.

Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, said fundamentals have had little to do with rising crude prices.

"If anything, the fundamentals became even more bearish amid this rally," he said.

Phil Flynn, an analyst at Alaron Trading Corp., said oil prices seem to have no personality of their own and are just following outside economic factors.

"They are being possessed by the dollar and the stock market," Flynn said. "It's not an oil market anymore. It's a stock-currency market because that's what we're reacting to right now."

The dollar gained strength against the euro yesterday. Because crude is bought and sold in U.S. currency, a barrel of crude became a little more expensive.

Tom Pawlicki, an analyst with MF Global research, noted that the four-week U.S. oil demand average is only 205,000 barrels per day above lows struck last October, and that demand has been falling fairly steadily since early January. Gasoline inventories rose week last even though the refineries that make gas cut back on production, Pawlicki said.

Dire employment numbers in March were also largely ignored by crude investors last week, which Schork described as "horrible."

"People want to buy," Schork said in his daily oil report. "We have yet to reconcile the whys and wherefores of this sentiment, but we cannot deny its existence."

Prices at the pump have fallen for six days now at a time when, at least for the past five years, prices have begun to tick upward as refiners switch over to more expensive summer blends and people begin to drive more.

Retail gasoline prices fell overnight to a new national average of US$2.039 for a gallon of regular unleaded, down a tenth of a cent from Sunday, according to auto club AAA, Wright Express and Oil Price Information Service.

Flynn said the summer driving season could be a key indicator of how much the U.S. economy is hurting, and people losing jobs will cut back on vacations if gas prices go through the roof.

The Federal Reserve has been pushing interest rates lower by adding more money to the financial system, but the Europeans have been more hesitant. If the dollar continues to lose value against the euro, Americans will wind up paying more at the pump, he said.

"It seems to be creating some oil price inflation in the short run that we're probably going to pay for down the road," Flynn said.

Ritterbusch said gasoline isn't facing oil's drastic supply surpluses and refineries are running at relatively low levels, so a couple of refinery snags could send prices upward.

"We still have plenty of time for a gasoline-led price rally like we usually tend to get in the spring," he said.

In other Nymex trading, gasoline for May delivery fell 1.69 cents to settle at US$1.49.24 a gallon and heating oil dropped 2.69 cents to settle at US$1.4191 a gallon. Natural gas for May delivery lost 6.9 cents to settle at US$3.732 per 1,000 cubic feet.

In London, Brent prices fell US$1.23 to settle at US$52.24 a barrel on the ICE Futures exchange.


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