Bad economic news eats away at the value of crude as consumers, businesses slash energy use

Oil prices dipped below $38 a barrel Tuesday on fresh evidence of weakness in the U.S. housing market and a shrinking gross domestic product that suggests the recession may be worsening.
A report by the Commerce Department showed that sales of new homes fell in November to the slowest pace in nearly 18 years, while new home prices dropped by the biggest amount in eight months.

“The energy markets are reacting first and foremost to bad economic news, and it seems like they’re almost waiting for something bad to occur,” said oil analyst Peter Beutel of Cameron Hanover.

A steady outpouring of gloomy economic news has pushed to the background events that over the summer may have led to price spikes, like OPEC’s announcement this month of unprecedented production cuts, Beutel said.

Prices have fallen 73 percent since July, with massive job layoffs and weak consumer spending eating away at energy use.

“Boy, it really looks ugly for the start of 2009,” said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.

“It’s really difficult to find something between now and inauguration time that says people are going to feel better, they’re going to drive more, they’re going to ship more packages,” Kloza said.

Light sweet crude for February delivery fell 93 cents to settle at $38.98 on the New York Mercantile Exchange after dipping to $37.79 earlier in the day.

Oil traders have grown increasingly pessimistic about the global economy, and thus demand for energy.

Economists now believe a small decline in economic activity in the third quarter has worsened significantly.

The Commerce Department said Tuesday that the gross domestic product, the broadest measure of economic health, declined at an annual rate of 0.5 percent in the July-September quarter. Corporate profits fell 1.2 percent.

Some economists believe the economy’s decline in the October-December period could be as large as 6 percent. If so, that would be the worst quarterly drop since 1982.

The pain appears to have spread through almost every level of the economy. On Tuesday, shares of card maker American Greetings Corp. sank to their lowest level in 21 years after the company reported it swung to a loss in its third quarter.

With at least 2 million jobs lost since the beginning of the year and an economy that continues to deteriorate, Americans have drastically cut down on gasoline purchases.

The Federal Highway Administration reported this month that Americans drove more than 100 billion fewer miles between November 2007 and October 2008, compared with the same period a year before.

Retail gasoline prices dropped for the 23rd week, reaching a national average of $1.653 a gallon as of Monday, according to the U.S. Energy Information Administration.

Gasoline futures on the Nymex tumbled as low as 82 cents a gallon Tuesday, the lowest levels in nearly five years.

“I’ve got no reason to buy in this market right now,” analyst and trader Stephen Schork said. “It all hinges on demand, and demand is rather lagging.”

Will consumers eventually see gas at $1 a gallon again?

“That seems remote,” Schork said. “You’d need to see crude below $20 (a barrel) before you could start talking about $1 a gallon at the pump.”

The wild swings in crude prices this year — from a record $147 a barrel to below $40 a barrel — has been especially hard on heating oil companies, small gas distributors and refiners that are selling fuel bought earlier this year when prices were high.

“They’re getting whipsawed in the market,” Schork said. “They don’t have the deep pockets to withstand the volatility.”

On Monday, Ogden, Utah-based oil company Flying J Inc. and two of its subsidiaries filed for Chapter 11 bankruptcy protection, citing a steep drop in oil prices and the lack of available financing due to the disruption in credit markets.

Flying J operates 250 travel plazas and fuel stations in 41 states and six Canadian provinces.

“They won’t be the last marketer or refiner that may have to go the bankruptcy route in the next year or so,” Kloza said. “It’s been pretty rugged out there.”

OPEC said last week it would slash production by 2.2 million barrels a day, its largest cutback ever, reducing the amount of oil produced each day by 4 million barrels in all when earlier cuts are included.

“It will take time for output cuts to flow through, but there’s some doubt about whether there will be full compliance,” said Toby Hassall, an analyst at investment firm Commodity Warrants Australia. “I wouldn’t be surprised if OPEC cut again in January or February. There’s been quite a significant demand side deterioration.”

Meanwhile, Iraq’s Oil Ministry announced it will open its second licensing round for developing its vast oil and gas fields. Iraq sits on more than 115 billion barrels of oil, but decades of war, U.N. sanctions, violence and sabotage have battered its oil industry.

On the Nymex Tuesday, gasoline futures fell less than a penny to settle at 86.6 cents a gallon. Heating oil fell 1.45 cents to settle at $1.327 a gallon while natural gas for January delivery jumped 44.3 cents to settle at $5.737 per 1,000 cubic feet.

In London, February Brent crude fell $1.09 to settle at $40.36 a barrel on the ICE Futures exchange.

Associated Press writers Martin Crutsinger, George Jahn and Alex Kennedy contributed to this report.

source: yahoo finance.

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