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Oil prices tumble below US$39 despite OPEC cuts

OIL prices tumbled below US$39 a barrel yesterday as traders shrugged off reports that OPEC had slashed production, focusing instead on falling stock prices.

Light, sweet crude for April delivery for April delivery fell 4 percent, or US$1.59, to settle at US$38.44 a barrel on the New York Mercantile Exchange. Prices got an early bump on reports that the Organization of Petroleum Exporting Countries had made good on a pledge to cut production by more than 4 million barrels per day.

Before noon in New York, however, prices retreated below US$40, where they had spent all of last week.

Brent crude fell 91 cents to settle at US$40.99 on the ICE Futures exchange in London.

"Reality has set in," said Andrew Lebow, senior vice president and broker at MF Global. "Demand is soft. Chinese imports are down. And everybody has their eyes glued on the equity markets."

The Standard & Poor's 500 index dropped to its lowest level in nearly 12 years yesterday. The benchmark index fell as low as 749.65, dropping below its Nov. 20 close of 752.44. That was the S&P 500's worst finish since April 14, 1997.

Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, said traders believe OPEC cuts are insignificant in the context of an unprecedented plunge in demand. Millions of laid off workers are not driving to work and companies, from manufacturers to the corner store, have slashed spending.

"They're having a tough time selling oil," Ritterbusch said. "There's so much out there right now."

Analyst Addison Armstrong noted a report by Petrologistics that OPEC has successfully slashed crude oil production in an attempt to force prices higher. The total February output for OPEC countries is expected to average 25.3 million barrels a day, down 4.3 million barrels a day from September, Armstrong said.

The Energy Information Agency reported last week that crude inventories in U.S. storage fell unexpectedly from a 20-month high, which some saw as proof the OPEC cuts were starting to stabilize the market.

OPEC's former president, Algerian Energy and Mines Minister Chakib Khelil, told state media on Sunday that the 13-nation cartel is likely to cut further when it meets on March 15.

While production cuts will help drain a massive global surplus of crude, "if they cut too much, you'll start to see all sorts of inflation in oil prices and that's not good," said Gene McGillian, analyst with Tradition Energy.

Economists warn a sharp uptick in oil prices could worsen the global downturn, as consumers and businesses cut back spending further.

The vast majority of economic data, however, points to weak demand for some time to come.

Dismal jobs, industrial production and corporate earnings reports so far this year have heightened investor fears that the worst U.S. recession in decades is deepening.

The Campbell Soup Co. reported yesterday that its second-quarter profit dropped 15 percent. The company said its profits were hurt by currency exchange rates and its margins were squeezed further by higher advertising and promotional spending.

"The macroeconomics news has been nothing but gloomy, especially on jobs, which really affects the real economy," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. "Demand looks gloomy in the near term, so there continues to be a lot of downward pressure on oil."

This downward pressure is not likely to recover soon, according to some analysts.

"Global economic statistics and lackluster performance in global shares suggest the odds are lengthening we will see a global economic recovery in the second half of this year," said analyst Stephen Schork.

In other Nymex trading, gasoline futures fell 3 cents to settle at US$1.0433 and heating oil fell 2 cents to settle at US$1.1754 a gallon. Natural gas for March delivery rose less than a penny to settle at US$4.097 per 1,000 cubic feet.


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