Oil Falls as Equities Drop on Concern Recession Is Deepening

Feb. 20 (Bloomberg) -- Crude oil fell below $39 a barrel, retreating from its largest gain in seven weeks, as global stock markets declined on concern the recession is deepening.

Oil lost as much as 6.5 percent as the Dow Jones Industrial Average tumbled below its lowest close since 1997. Crude jumped 14 percent yesterday after a report showed an unexpected decrease in U.S. inventories last week. The March crude oil contract expired at the close of floor trading today.

“I don’t think anybody trading commodities can look at what’s going on across the way on the Big Board and not just sell,” said Brad Samples, an analyst for Summit Energy Inc. in Louisville, Kentucky. He forecast that oil will drop to the low $30s or even to the $20s. “I don’t think that’s outside the realm of possibility anymore.”

Crude oil for March delivery fell 54 cents, or 1.4 percent, to settle at $38.94 a barrel at 2:51 p.m. on the New York Mercantile Exchange. The futures rose 3.8 percent this week, the first weekly gain in the past four. Prices are down 13 percent this year. Yesterday, oil gained 14 percent to $39.48 a barrel.

The more-active April contract fell 15 cents, or 0.4 percent, to $40.03 a barrel.

“The gloom that cloaks the rest of the globe’s financial markets could not be ignored for long and is dragging down oil prices,” Michael Fitzpatrick, vice president for energy at MF Global Ltd. in New York, said in a report.

S&P, Topix

The Standard & Poor’s 500 Index had its biggest weekly drop since November, and Japan’s Topix Index reached its worst level since 1984. The MSCI index of 23 developed countries fell 1.6 percent to 777.85, the ninth straight daily decline.

U.S. stocks pared earlier losses after a report that the Treasury Department next week will release some details of its plan to rescue the financial system.

Treasuries rallied, and gold topped $1,000 an ounce in New York for the first time in almost a year, as investors spooked by plunging stocks and a deepening recession sought to protect their wealth.

“Equities are in bad shape today and so commodities are suffering,” said Hannes Loacker, an analyst at Raiffeisen Zentralbank Oesterreich AG in Vienna. “The economy has to recover before we see any substantial increase in oil prices.”

Barclays Capital cut its forecast for the average 2009 Brent crude oil price to $60 a barrel from $71 a barrel because of the weakening global economic outlook. The bank expects world oil demand to drop 1.25 million barrels a day this year.

“The start of sustainable price recovery may have to wait for a clearer bottoming of the economic cycle,” Barclays analysts led by Paul Horsnell said in a report yesterday.

Brent crude oil for April settlement lost 10 cents to $41.89 a barrel on London’s ICE Futures Europe exchange.

Demand Falls

Fuel demand during the past four weeks averaged 20 million barrels a day, down 0.1 percent from the average over the same period last year, the Energy Department said yesterday. Gasoline consumption averaged 8.9 million barrels a day for the period, up 0.8 percent from a year earlier.

U.S. motorists reduced driving by the most in 66 years in 2008, the Federal Highway Administration said yesterday in a report. Vehicle-miles traveled last year fell by 107.9 billion, or 3.6 percent.

The driving report and yesterday’s Labor Department report showing the number of Americans collecting unemployment benefits broke a record for the fourth straight week “just shows there’s not going to be a quick change in the economy anytime soon, and there’s no support for the crude markets,” said Chris Dillman, an analyst with Tradition Energy in Stamford, Connecticut.

Trading Volume

Volume in electronic trading on the exchange was 404,693 contracts as of 3:04 p.m. in New York. Volume totaled 612,055 contracts yesterday, 17 percent higher than the average over the past three months. Open interest was 1.2 million contracts yesterday. The exchange has a one-business-day delay in reporting open interest and full volume data.

Gasoline for March delivery fell 2.4 cents, or 2.2 percent, to $1.0746 a gallon on the Nymex. Heating oil for March delivery lost 0.78 cent, or 0.7 percent, to $1.1967 a gallon.

Oil inventories dropped 138,000 barrels to 350.6 million barrels last week, the first decline this year, the Energy Department report showed. Analysts had forecast an increase of 3.2 million barrels, according to a Bloomberg News survey.

U.S. supplies have risen 21 percent since September. Inventories at Cushing, Oklahoma, the delivery point for New York futures, have almost doubled since November. Stockpiles have climbed amid a situation known as contango, in which prices for oil to be delivered in future months are higher than for earlier ones. This allows buyers to profit from holding oil.

Oil for delivery in April cost $1.09 a barrel more than for March delivery today, and crude for delivery in March 2010 was $12.08 a barrel more.

Dose of Optimism

“The market has been used to seeing bigger-than-expected builds in U.S. supplies each week, and to get an actual negative number gave the market a fresh dose of optimism,” said Mark Pervan, a senior commodity strategist at Australia and New Zealand Banking Group Ltd. in Melbourne. “Still, I can’t see anything that’s shown the demand in the market has started to pick up. I think it’s just a matter of limiting supply.”