Oil Trades Near $40 After Slump of 10% on Deepening Recession

March 3 (Bloomberg) -- Crude oil was little changed near $40 a barrel in New York after slumping 10 percent yesterday on signs the recession in the world’s largest economies is deepening, threatening further weakness in demand for fuel.

Oil dropped as the Dow Jones Industrial Average slipped yesterday below 7,000 for the first time since 1997 after Warren Buffett said the economy is in “shambles” and insurer American International Group Inc. reported a $61.7 billion loss. U.S. manufacturing in February shrank for a 13th consecutive month.

“Until the bad economic news abates, we are going to primarily move on demand concerns,” said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $9 billion natural-resource-company bond portfolio. “At this point there are no signs pointing to when this crisis will come to an end.”

Crude oil for April delivery rose 3 cents to $40.18 a barrel on the New York Mercantile Exchange at 11:08 a.m. Sydney time. Yesterday, futures plunged $4.61 to settle at $40.15 a barrel, the biggest one-day drop since Jan. 7. Prices are down 10 percent so far this year.

Brent crude oil for April settlement declined $4.14, or 8.9 percent, to end the session at $42.21 a barrel yesterday on London’s ICE Futures Europe exchange. The discount of oil in New York to the Brent grade in London widened to $2.06 a barrel. That’s less than the $10.67 discount on Feb. 12.

The Institute for Supply Management’s factory index was 35.8 last month from 35.6 in January. Readings less than 50 signal contraction.

‘Close Correlation’

The Dow declined 299.64 points, or 4.2 percent, to 6,763.29 yesterday. The Standard & Poor’s 500 Index fell 34.27 points, or 4.7 percent, to 700.82.

“There has recently been a close correlation between the stock and energy markets,” said Rick Mueller, a director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The Dow has become an indicator for where the economy is going.”

Manufacturing also contracted in China last month. The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 45.1 from 42.2 in January, CLSA Asia-Pacific Markets said yesterday.

U.K. manufacturing shrank for a 10th month, the Chartered Institute of Purchasing and Supply said in a report yesterday.

Commodities Tumble

“We are focused on the economic slowdown and its ramifications for demand,” said Phil Flynn, a senior trader at Alaron Trading Corp. in Chicago. “The news about AIG is weighing on both the stock market and energy markets. It’s hard to be optimistic with the steady dose of poor economic news.”

Commodities yesterday had the biggest drop since October as the deepening global recession slashed demand. The Reuters/ Jefferies CRB Index of 19 raw materials fell 11.23, or 5.3 percent, to 200.34, the biggest decline since Oct. 10. The 6.6 percent decrease on that date was the largest since the debut of the index in 1956.

Oil also declined as the dollar strengthened to the highest level since April 2006 against the currencies of six major U.S. trading partners, reducing the appeal of commodities as an alternative investment.

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, climbed to 88.969.

Officials from the Organization of Petroleum Exporting Countries, the supplier of 40 percent of the world’s oil, gave conflicting signals on their intentions to cut output further when they meet in Vienna on March 15.

OPEC Compliance

The group “will likely” reduce supplies to support prices, Algerian Oil Minister Chakib Khelil said in an interview in Madrid yesterday. Earlier this week, Iran’s oil minister said OPEC is unlikely to lower crude production when it meets.

OPEC members have reached almost 100 percent compliance with existing cuts at the end of February, Khelil said. The group has implemented as much as 80 percent of previously announced supply cuts, preventing a sharp fall in the oil price, Iranian Oil Minister Gholamhossein Nozari said in comments posted March 1 on the Web site of state-run Iranian Students News Agency.

“OPEC has been very aggressively cutting output but has more work to do before prices will rise,” Mueller said.

Gasoline futures for April delivery fell 45 cents to $1.2817 a gallon in New York today, after falling 8.63 cents yesterday to settle at $1.2862 a gallon in New York.