Oil prices drop below $40 on weak demand

COLUMBUS, Ohio - Oil prices dipped below $40 per barrel Friday for the first time this year as the government reported the nation’s worst annual job losses since World War II.

People are traveling less, manufacturers are slashing production and there are job cuts across almost every sector of the economy, leading to a severe drop-off in energy use.

What was a bright spot, rapidly falling gasoline prices, has reversed course.

The average national retail price for gasoline rose again overnight, the 10th day in a row it has done so, even as crude prices fall. Gasoline bottomed out at $1.61 a gallon on Dec. 30 before rebounding with crude, but have yet to catch up in volatile energy market.

The Labor Department said employers slashed 524,000 jobs in December and 2.6 million jobs for all of 2008. It was the worst annual loss since 2.8 million jobs were loss in 1945, although the number of jobs has more than tripled since then. The nation’s unemployment rate jumped to 7.2 percent, the highest since 1993.

Light, sweet crude for February delivery fell 87 cents to settle at $40.83 on the New York Mercantile Exchange after dipping as low as $39.38.

Crude has closed lower every day this week, with dire economic news overshadowing armed conflict in the oil-rich Middle East, a dispute that has shut off or disrupted natural gas supplies to more than a dozen European nations, and diminished crude exports from the Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply.

Oil prices have fallen 17 percent since opening for trade Monday at $49.28.

Signs of deepening recession
The unemployment report bolsters how the worst recession in decades has taken hold of the U.S. economy. At the same time, crude oil continues to flood the market with traders storing oil at sea in hopes that it can be sold later should prices rise.

Oil analyst Stephen Schork notes in his daily report how weak the economy has become, especially in the auto and steel industries.

The Detroit Three automakers have announced extended holiday shutdowns. Chrysler has said it is closing all 30 of its North American manufacturing plants for four weeks because of slumping sales; Ford will shut 10 North American assembly plants for an extra week in January, and General Motors will temporarily close 20 factories — many for the entire month of January — to cut vehicle production.

Meanwhile, U.S. Steel is idling plants in Granite City, Ill., Keewatin, Minn., and its Great Lakes Works near Detroit.

“These two anecdotes from the auto and steel industries tell us all we need to know about how dicey the current economic situation is,” he wrote.

On Friday, KB Home, one of the nation’s largest homebuilders, reported sales fell 56 percent to $919 million in the fourth quarter compared with last year. Homes delivered were less than half the 8,132 delivered a year earlier as foreclosures mounted and credit dried up.

Many traders figured oil had reached a bottomed after price took off toward $50, Schork said.

“I think this week has been a dose of reality for them,” he said.

Eroding demand for energy
Friday’s decline capped another bad week for oil prices, though crude at one point rose above $50 a barrel from a five-year low of $33.87 on Dec. 19.

First, it was the National Association of Realtors reporting that pending home sales fell to the lowest level on record in November. Then the government reported that orders to factories fell for a record fourth straight month in November.

On Wednesday, prices fell 12 percent after the Energy Information Administration said that crude oil inventories rose 6.7 million barrels, well above the 1.5 million-barrel build expected by analysts, followed by Friday’s unemployment news.

Rising U.S. inventories show just how badly demand for energy has eroded.

But Peter Beutel of Cameron Hanover said in his Friday report that despite the bearish news, he is looking for prices to stabilize, helped by the government’s stimulus packages, interest rate cuts, low mortgage rates and OPEC production cuts.

Deutsche Bank lowered its forecast for oil prices to $45 from $55 for the first quarter. Analyst Adam Sieminski said he expects a sharp recovery in prices, perhaps in the second half of 2010.

“We expect global oil demand growth to be significantly worse in 2009 than consensus forecasts. In an environment of rising OPEC spare capacity and excess global refining capability, we believe oil prices will not hit rock bottom until the end of this year as OPEC production cuts work their way through the system and global growth starts to recover,” Deutsche Bank said in a note to investors.

Heating oil prices also continued to move lower even with the forecast of a major winter storm from the Midwest into New England that could dump up to 8 inches of snow by Saturday night.

Despite the decline in crude, prices at the pump continued to inch up, climbing 2 cents overnight to $1.782 a gallon, according to auto club AAA, Oil Price Information Service and Wright Express. Prices now a dime higher than a month ago, but still $1.318 below prices a year ago.

Jim Ritterbusch, president of Ritterbusch and Associates, said gasoline prices have followed crude higher, but he looks for those prices to come down now that oil is moving lower.

In other Nymex trading, gasoline futures rose 2.3 cents to settle at $1.1112 a gallon. Heating oil fell 3.2 cents to settle at $1.4877 a gallon while natural gas for February delivery lost 6.7 cents to settle at $5.516 per 1,000 cubic feet.

In London, February Brent crude fell 25 cents to settle at $44.42 a barrel on the ICE Futures exchange.

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