Oil Trades Below $35 as Global Recession Cuts Demand for Fuel

Feb. 18 (Bloomberg) -- Crude oil traded below $35 a barrel after falling the most in three weeks yesterday on speculation a deepening recession in the U.S., Europe and Asia will cut fuel demand at a time of plentiful supply.

Oil dropped as equities plunged on concern banks may face ratings downgrades and further losses as economies slow. Manufacturing in New York this month dipped to the lowest level since records began in 2001, the Federal Reserve Bank of New York’s general economic index showed.

“We won’t see the market trend higher until there is a firm belief on the part of investors that the economy is turning around,” said Adam Sieminski, the chief energy economist at Deutsche Bank AG in Washington. “I don’t believe the change in outlook will occur until the second half of the year.”

Crude oil for March delivery was trading 8 cents lower at $34.85 a barrel at 7:44 a.m. Singapore time on the New York Mercantile Exchange.

In New York yesterday, futures fell $2.58, or 6.9 percent, to settle at $34.93 a barrel, the biggest decline since Jan. 27. Prices are down 22 percent this year.

“The continued fallout from the stock market” is weighing on oil price gains, said Mike Sander, an investment adviser at Sander Capital Advisors Inc. in Seattle. “Other factors include the strengthening of the dollar, and signs of a weakening banking sector in Europe.”

Equities Slump

U.S. stocks tumbled to a three-month low, extending a global slump. The Standard & Poor’s 500 Index decreased 4.6 percent to 789.17, declining below 800 for the first time since November.

Prices for oil to be delivered in future months are higher than for earlier ones, a situation known as contango, allowing buyers to profit from hoarding oil. The price of oil for delivery in April is $3.61 a barrel higher than for March. December futures are up $13.87 from the front month.

An Energy Department report on Feb. 19 will probably show that U.S. crude oil inventories rose 3.2 million barrels last week, according to the median of 11 analyst responses in a Bloomberg News survey. It would be the 19th gain in 21 weeks.

Gasoline stockpiles probably declined 300,000 barrels in the week ended Feb. 13, the survey showed. Supplies of distillate fuel, a category that includes heating oil and diesel, probably dropped 1.5 million barrels.

Gasoline futures for March delivery fell 9.45 cents, or 7.8 percent, to $1.1118 a gallon yesterday in New York, the lowest settlement since Jan. 27.

Gasoline Price

The average U.S. pump price for regular gasoline dropped 0.5 cent to $1.96 a gallon, AAA, the nation’s largest motorist organization, said on its Web site yesterday. Prices have declined 52 percent from the record $4.114 a gallon reached on July 17.

Heating oil for March delivery fell 11.36 cents, or 8.7 percent, to settle at $1.1864 a gallon, the lowest since Sept. 10, 2004. It was the biggest one-day drop since Dec. 24.

“All the economic doom and gloom is weighing on the market,” said Tom Bentz, senior energy analyst at BNP Paribas in New York. “There’s no specific headline that’s responsible for the pressure on prices. This market is finding it impossible to hold any gains.”

The MSCI World Index decreased 4.1 percent to 796.77, extending its 2009 retreat to 13 percent. The gauge of 23 developed markets has dropped for six straight days.

“The overwhelming focus of the market is the macroeconomic situation, not specific items about oil, which was the case in the past,” said Michael Fitzpatrick, vice president for energy at MF Global Ltd. in New York. “The market-directional cues will come from the economy for quite a while.”

Commodity Markets

The recession is weighing on all commodity markets with the exception of precious metals. The Reuters/Jefferies CRB Index of 19 prices dropped for the sixth straight day, the longest slump since December. The index touched 203.25, the lowest since June 21, 2002, and has slipped 11 percent this year.

The Organization of Petroleum Exporting Countries, the U.S. Energy Department and International Energy Agency cut their demand forecasts this month because of the economic contraction.

“The economic news is putting demand concerns front and center,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “All of the major agencies have been revising their demand lower yet again.”

OPEC, supplier of more than 40 percent of the world’s oil, may cut production at a March 15 meeting if prices and markets are unstable, Iraqi Oil Minister Hussain al-Shahristani said.

“If demand is going to stay down as it has done, then obviously we will need to cut production,” he said at a conference in Doha, Qatar, today.

‘It Ain’t Enough’

The 12-member group cut oil production 3.5 percent in January, according to a Bloomberg News survey. Producers with output quotas, all members except Iraq, pumped 26.2 million barrels a day, 1.355 million more than their target of 24.845 million barrels a day.

“Demand is going to stay on the defensive, and the only thing that will stop the bleeding is OPEC,” said Dominick Chirichella, senior partner at the Energy Management Institute in New York. “They’ve done some things to control supply but the market is saying, ‘It ain’t enough.’”

Brent crude oil for April settlement declined $2.25, or 5.2 percent, to end the session at $41.03 a barrel on London’s ICE Futures Europe exchange, the lowest since Dec. 30.

“For the rest of the year the market will shift focus from day to day,” Sieminski said. “Prices will move wildly within a range due to economic concerns, fundamental oil news, and maybe geopolitics.”

Volume in electronic trading on the exchange was 471,632 contracts as of 3:20 p.m. yesterday in New York. Volume totaled 697,606 contracts Feb. 13, 34 percent higher than the average over the past three months. Open interest on that date was 1.26 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.