Wednesday, January 28, 2009

Oil near $45 as OPEC cuts weighed against demand

LONDON (AP) -- Oil prices fell toward $45 a barrel Tuesday as traders weighed waning demand in global markets against OPEC countries' compliance with agreed production cuts.

Light, sweet crude for March delivery was down $0.45 to $45.28 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Europe. The contract fell 74 cents Monday to settle at $45.73.

The Organization of Petroleum Exporting Countries has announced 4.2 million barrels a day in production cuts since September in an attempt to stabilize oil prices, which have fallen almost 70 percent since peaking at nearly $150 a barrel in July.

Monday's lower settlement price belied a surge earlier in the day that saw oil rise to $48.60 "against a backdrop of reports that imply OPEC compliance, at around 70 percent, is higher than many market participants took into account," said analysts at JBC Energy in Vienna, Austria. They added that they expected compliance "to eventually reach 75 percent."

"Traders are hoarding oil now in the hope of a recovery in the price in perhaps one month's time if OPEC has complied with production cuts," said Mark Pervan, senior commodity strategist with ANZ Bank in Melbourne.

There has been skepticism OPEC member nations will comply with the promised cuts and doubts that the cuts, even if fully implemented, are big enough to offset the collapse in demand for crude. OPEC controls about 40 percent of world crude supplies.

"OPEC has been notorious in the past for not complying with promised output cuts so there is a bit of caution," said Pervan.

Economic concerns remain the other major preoccupation for the oil market. Stock markets fell in Europe Tuesday and more bad economic news came in the form of a closely watched index that showed home prices in the U.S. dropped by the sharpest annual rate on record in November. The Standard & Poor's/Case-Shiller 20-city housing index released Tuesday tumbled by a record 18.2 percent from November 2007, the largest decline since its inception in 2000.

"It's a continuous theme. Economic data has continued to disappoint, and people fear weaker demand in the future," said Nimit Khamar, a research analyst at Sucden Financial Research in London. "Things aren't improving as fast as people hoped, which is why oil prices are not allowed to rally despite efforts from OPEC.

"Unless OPEC are allowed to cut supply over the next four to five months, weaker demand is going to mean prices will remain subdued," Khamar added.

U.S. earnings results this week are expected to confirm the dire state of the world's largest economy and No. 1 consumer of crude. Hundreds of companies will issue reports, including Procter & Gamble Co., Kimberly-Clark Corp. and Starbucks Corp.

Earnings season also is getting into full swing in Japan, the world's second-largest economy, with Sony Corp. and Honda Motor Co. scheduled to release results later this week.

The likelihood of a prolonged recession in the U.S. that would further reduce demand for crude was underscored by the White House. The American economy will "get worse before it gets better," Vice President Joe Biden said Sunday.

"From a logical point of view, there is no reason for spot Nymex crude oil to trade above $40," analyst and trader Stephen Schork wrote in his daily publication, The Schork Report. "OPEC is cutting production because no one is buying their oil. And, given the dire global economic outlook ... that is not about to change."

Ritterbusch said in the near term prices are likely to swing between the mid-$30 range on the down side and the mid-$50 to low-$60 range on the high side.

In other Nymex trading, gasoline futures were unchanged at $1.58 a gallon while natural gas rose 6.0 cents to $4.55 per 1,000 cubic feet. Heating oil fell 0.25 cents to $1.42 a gallon.

In London, the March Brent contract fell 75 cents to $46.21 on the ICE Futures exchange.
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