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Oil prices tumbled on US job cuts and other economic omens

OIL prices tumbled nearly 4 percent yesterday in a volatile trading day fraught with more bad economic news, including thousands of job cuts by Macy's department store.

Light, sweet crude for March delivery fell US$1.60 to settle at US$40.08 a barrel on the New York Mercantile Exchange after tumbling at one point to US$39.83.

Americans have cut spending on everything from clothes to gasoline, and those cuts are showing up in falling crude prices and tumbling sales for retailers.

Macy's Inc. said it would slash 7,000 jobs, or 4 percent of its work force, less than a month after announcing it would close 11 stores.

Stocks were mixed yesterday morning after the Institute for Supply Management said US manufacturing activity rose during January from a record low. But after oil gave up its gains, the Dow fell more than 100 points in afternoon trading.

"Anytime you get any relatively positive data, it tends to react accordingly and you get a nice little bounce out of it," said Bob Yawger, vice president of energy futures for MF Global. "Now we've retraced it over since then."

Gasoline futures had been one of the only commodities on the New York Mercantile Exchange to remain steady last week with some 24,000 refinery workers threatening to strike. Negotiations were extended and workers showed up as usual yesterday. Gasoline futures tumbled more than 9 percent.

Still, retail gasoline has been rising for a month as refiners cut back production.

Phil Flynn, an analyst at Alaron Trading Corp., said most people believe there will be a deal reached with refinery workers.

"Obviously these talks can turn the other way. And if they do, the markets can turn the other way," Flynn said. "But I think getting through the weekend without a strike was enough for the market to speculate that they'll probably get a deal done."

That aimed traders' eyes on the economy, and there was no shortage of bad news.

Consumer spending fell for a record sixth straight month in December as recession-battered households, worried about surging layoffs, boosted their savings rates to the highest level since May. And the Commerce Department reported that total construction spending dropped by 1.4 percent in December, slightly worse than the 1.2 percent decline economists expected.

Analyst and trader Stephen Schork, writing in his Schork Report publication, said the "market's knee-jerk euphoria" with Friday's news that the U.S economy at the end of 2008 was less dead than originally feared was "misguided to say the least."

Private businesses increased their inventories by US$6.2 billion in the fourth quarter, following two previous quarterly decreases, suggesting they won't need to replenish until the current glut is cleared. That doesn't bode well for industrial commodities such as crude oil, he said.

There were signs that OPEC members were generally complying with significant output reductions, but it was unclear whether that had buoyed prices.

After a year when oil prices soared to a record US$147 a barrel in July only to collapse to US$33 in December, crude has traded in the low US$40 range for the last week or so as investors eye weakening crude demand matching OPEC production cuts.

The Organization of Petroleum Exporting Countries has promised to slash output by 4.2 million barrels and has suggested more production cuts may be on the way.

In other Nymex trading, gasoline futures tumbled 19 cents to settle at US$1.1535 a gallon. Heating oil slid 9.16 cents to settle at US$1.3424 a gallon while natural gas for March delivery rose 14 cents to settle at US$4.557 per 1,000 cubic feet.

In London, the March Brent contract slumped US$2.06 to settle at US$43.82 on the ICE Futures exchange.


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