Oil Falls for the First Time in Four Days as Recession Deepens

Feb. 27 (Bloomberg) -- Crude oil fell for the first time in four days on concern energy demand will decline, after the U.S. economy contracted faster than anticipated.

Oil dropped after the government said gross domestic product shrank at an annual pace of 6.2 percent in the fourth quarter, the most since 1982. Prices also retreated as the dollar strengthened, reducing the appeal of commodities as an alternative investment.

“The GDP numbers are terrible and that’s putting pressure on the oil market,” said Michael Fitzpatrick, a vice president for energy at MF Global Ltd. in New York. “Demand has cratered, and after these numbers we can expect it to sink further. The dollar is up, taking additional froth out of the market.”

Crude oil for April delivery fell 46 cents, or 1 percent, to settle at $44.76 a barrel at 2:50 p.m. on the New York Mercantile Exchange. Prices are up 7.4 percent this month and 0.4 percent so far this year. Futures have dropped 70 percent from the record $147.27 a barrel reached on July 11.

Oil rose $2.72, or 6.4 percent, to $45.22 a barrel yesterday, the highest settlement since Jan. 26.

GDP was projected to contract at a 5.4 percent annual pace last quarter, according to the median estimate of 74 economists surveyed by Bloomberg News. Forecasts ranged from declines of 3.8 percent to 6 percent.

U.S. manufacturing shrank in February and confidence among consumers declined, private reports today showed. The Institute for Supply Management-Chicago Inc.’s business barometer indicated a contraction for a fifth consecutive month, while the Reuters/University of Michigan final index of consumer sentiment fell for the first time since November.

Japanese Output

Japan’s month-on-month decline in factory output exceeded the December record drop of 9.8 percent, the Trade Ministry said today in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years.

The U.S. and Japan are responsible for about 30 percent of global oil consumption.

“We will continue to see prices fall as the depths of the economic catastrophe become clear,” said Rick Mueller, a director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts.

The dollar rose to the highest in almost three years against the currencies of six major U.S. trading partners as the deepening recession and the third government bailout of Citigroup Inc. stoked demand for safety.

Dollar Gain

The dollar gained 0.4 percent to $1.2697 per euro from $1.2744 yesterday. The Dollar Index, which the ICE exchange uses to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, reached 88.490, the highest level since April 2006.

Brent crude oil for April settlement declined 16 cents, or 0.3 percent, to end the session at $46.35 a barrel on London’s ICE Futures Europe exchange.

Oil prices increased earlier this week after a U.S. government report showed a drop in gasoline stockpiles and OPEC members called for further cuts in output.

“The market tested the $45 area again yesterday, but failed to advance further,” said Tom Bentz, senior energy analyst at BNP Paribas in New York. “Yesterday’s failure to break out decisively was followed by a lot of negative economic news today.”

Ministers from the 12-member the Organization of Petroleum Exporting Countries will gather on March 15 in Vienna to discuss second-quarter supply. OPEC agreed to three supply cuts in 2008 to halt sliding prices.

Market Focus

“The market was focused on the potential for further OPEC cuts earlier this week, but I doubt they will make an additional cut with prices at this level,” Mueller said. “The market will come under greater downward pressure as we get more bad economic news, further evidence of plentiful supply and spare production capacity grows.”

The 11 OPEC members with quotas, all except Iraq, cut output 3.8 percent to 25.3 million barrels a day in February, consultant PetroLogistics Ltd. of Geneva said this week.

“What we are concerned with is that suddenly there is economic growth or recovery in all countries, and further reductions of the quota may trigger an abrupt rise in prices,” Nobuo Tanaka, the executive director of the International Energy Agency, said in an interview in Lisbon today. “That is not good for the economic recovery.”

The Paris-based IEA on Feb. 11 cut its oil-demand forecast for 2009, projecting consumption will fall by 1 million barrels a day, the biggest drop since 1982. It cited a weaker economic outlook from the International Monetary Fund. The agency was set up in 1974 in response to the Arab oil embargo.

Gasoline Futures

Gasoline futures for March delivery fell 1.97 cents, or 1.5 percent, to settle at $1.2807 a gallon in New York. Futures settled at $1.3004 yesterday, the highest since Nov. 13.

The average U.S. pump price for regular gasoline rose 0.1 cent to $1.883 a gallon yesterday, the first gain since Feb. 15, AAA, the nation’s largest motorist organization, said on its Web site. Prices have declined 54 percent from the record $4.114 a gallon reached in July.

Crude oil volume in electronic trading on the exchange was 450,922 contracts as of 3:06 p.m. in New York. Volume totaled 566,268 contracts yesterday, 7 percent higher than the average over the past three months. Open interest was 1.19 million contracts yesterday. The exchange has a one-business-day delay in reporting open interest and full volume data.