Oil Falls on Signs Demand May Drop Faster Than OPEC Cuts Supply

Feb. 23 (Bloomberg) -- Crude oil fell 4 percent on speculation demand will decline faster than the Organization of Petroleum Exporting Countries is curbing supply.

OPEC, the U.S. Energy Department and the International Energy Agency cut their demand forecasts this month because of the recession. U.S. stocks fell for a sixth day, a sign that fuel consumption may drop further. The 11 members with quotas, all except Iraq, reduced output 3.8 percent to 25.3 million barrels a day in February, consultant PetroLogistics Ltd. of Geneva said.

“As long as there’s a recession, it’s hard to see oil prices rising,” said Bill O’Grady, chief markets strategist at Confluence Investment Management in St. Louis. “OPEC’s doing a credible job, but their power is limited.”

Crude oil for April delivery declined $1.59 to settle at $38.44 a barrel at 2:46 p.m. on the New York Mercantile Exchange. Prices are down 14 percent this year. Oil declined in nine of the last 11 trading sessions.

Supply from 11 OPEC members will average 25.3 million barrels a day in February, down from 26.3 million barrels in January, Conrad Gerber, founder of PetroLogistics, said in an interview. Members have a quota of 24.845 million barrels a day.

Iran, Venezuela and Iraq said last week that OPEC is prepared to cut production again when it meets on March 15. The group agreed Dec. 17 on output constraints that would reduce supplies in January by 2.2 million barrels a day from December levels. That followed pledges to remove 2 million barrels a day in the fourth quarter of last year.

Price Balance

“The $40 area is the zone of equilibrium for this market,” said John Kilduff, senior vice president of energy at MF Global Inc. in New York. “The market is delicately balanced. You aren’t going to see a sustained rally as long as the economic outlook is negative, despite signs that OPEC is complying with its quota.”

The price of oil for delivery in May is $2.83 a barrel higher than for March. December futures are $10.19 higher than the front-month contract. This structure, in which the future month’s price is higher than the one before it, is known as contango and allows buyers to profit from hoarding oil.

Volume in electronic trading on the exchange was 440,371 contracts as of 3:05 p.m. in New York. Volume totaled 447,535 contracts on Feb. 20, 14 percent lower than the average over the past three months. Open interest was 1.17 million contracts Feb. 20. The exchange has a one-business-day delay in reporting open interest and full volume data.

Cushing Stockpile

Crude oil supplies at Cushing, Oklahoma, where New York- traded West Texas Intermediate crude is delivered, declined 52,000 barrels to 34.9 million barrels in the week ended Feb. 13, an Energy Department report on Feb. 19 showed. Inventories in the week ended Feb. 6 were the highest since at least April 2004, when the department began keeping records for the location.

“The front month is being depressed because of supplies at Cushing,” said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta.

U.S. equities dropped, sending the Standard & Poor’s 500 Index below its lowest close in 12 years, on concern that the deepening recession will erode earnings at technology companies offset the government’s pledge to provide more capital to struggling banks. The S&P 500 lost 3.5 percent to 743.33, the lowest close since April 11, 1997.

“Energy prices are moving on signals from the equity market,” Kilduff said.

Obama Budget

President Barack Obama will make a televised address to a joint session of Congress tomorrow. An overview of Obama’s budget proposal for the 2010 fiscal year, which begins Oct. 1, will be released Feb. 26.

“We are waiting for a compelling story that will result in a price direction,” Edmonds said. “OPEC is being fairly diligent in meeting its production target but people are focused on the economy. We need to have a better idea of what the recovery plan will look like.”

U.S. crude-oil stockpiles increased 1 million barrels last week, according to the median of nine analyst estimates before an Energy Department report this week. Analysts were split over whether gasoline supplies rose or declined. Stockpiles of distillate fuel, a category that includes heating oil and diesel, dropped 1.5 million barrels, according to the survey.

The department is scheduled to release its weekly report on Feb. 25 at 10:30 a.m. in Washington.

Gasoline futures for March delivery declined 3.13 cents, or 2.9 percent, to settle at $1.0433 a gallon in New York. Heating oil for March delivery dropped 2.13 cents, or 1.8 percent, to end the session at $1.1754 a gallon.

The average U.S. pump price for regular gasoline fell 0.7 cents to $1.91 a gallon, AAA, the nation’s largest motorist organization, said on its Web site today. Prices have declined 54 percent from the record $4.114 a gallon reached on July 17.

Brent crude oil for April settlement declined 90 cents, or 2.1 percent, to end the session at $40.99 a barrel on London’s ICE Futures Europe exchange.