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Oil tumbles below US$69 per barrel; supplies jump

CRUDE and gasoline prices fell sharply yesterday on more evidence of a huge glut in supply, with the U.S. economy still damaged by the worst recession since the 1930s.

Natural gas, which is seeing the same buildup in supply because of anemic industrial production, continued to spike, however. Prices jumped nearly 7 percent yesterday.

The difference between crude and natural gas, as far as markets are concerned, is that crude prices have climbed for months while natural gas hit seven-year lows this month. That has attracted a lot of bargain hunters and lifted natural gas prices off of those lows, but it's still comparatively cheap.

Benchmark crude for November delivery tumbled nearly 4 percent, or US$2.79, to settle at US$68.97 a barrel on the New York Mercantile Exchange.

A falloff in energy prices accelerated in midmorning when the government reported that supplies of crude, gasoline and distillate fuel used for diesel and heating oil surged well above expectations.

Crude supplies jumped by 2.8 million barrels and gasoline by 5.4 million barrels last week, according to the Energy Information Administration. Analysts had expected crude levels to decline by nearly that much, according to a survey by Platts, the energy information arm of McGraw-Hills Cos.

Even with supplies more than ample, oil prices have remained close to US$70 per barrel partly because of the battered U.S. dollar.

Crude is priced in dollars so it becomes cheaper when the dollar falls. The dollar is at a nearly one-year low against the euro, and fell yesterday after the Federal Reserve said it would keep interest rates at a record low - near zero. Critics have complained that the Fed appears to be printing money to pay for the government's spending binge, and that hurts the dollar.

Even with the dollar falling again yesterday, the amount of oil and gasoline in the ground right now is difficult to ignore. There is not much to suggest that demand will rebound soon and draw down huge supplies of fuel.

Refiners that make gasoline are getting hit hard due to the lack of demand and thin margins.

"They reflect purely fundamentals on the ground and those fundamentals are ugly," Tom Kloza, chief oil analyst of the Oil Price Information Service.

If refiners start cutting back on crude purchases, the price of oil could fall further. Gasoline prices may have leveled out.

It has been a volatile month for natural gas, on the other hand. Prices are now up around 60 percent since bottoming several weeks ago. Still, natural gas cost as little as US$2.41 per 1,000 cubic feet early this month and any shift upward can look big in percentage terms.

Natural gas futures can still be had at a 70 percent discount compared with highs in the summer of 2008, meaning anyone who uses natural gas for heat should have a pretty cozy winter.

In other Nymex trading, gasoline for October delivery fell about 7.67 cents to settle at US$1.7049 a gallon, and heating oil lost 5.27 cents to settle at US$1.7594 a gallon. Natural gas rose 25.1 cents to settle at US$3.86 per 1,000 cubic feet.

In London, Brent crude tumbled US$2.54 to settle at US$67.99 on the ICE Futures exchange.


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