Crude Oil Falls on Outlook for Weaker Economy Curtailing Demand

Jan. 7 (Bloomberg) -- Crude oil fell for a second day in New York on forecasts the U.S. economy will worsen, curtailing demand in the world’s biggest energy-consuming country.

Oil extended its decline after the U.S. Federal Reserve released minutes of a meeting of policy makers last month that showed they believed “downside risks to the economy would be substantial.” Futures also dropped on speculation that supplies rose last week.

“We’re not out of the woods yet,” said Adam Sieminski, the chief energy economist at Deutsche Bank AG in Washington. “We’re still in the mode where the most important factor is the economy, and that’s still not looking like we know where the bottom is.”

Oil for February delivery fell as much as 35 cents, or 0.7 percent, to $48.23 a barrel on the New York Mercantile Exchange, and was at $48.39 at 7:23 a.m. in Singapore. Yesterday futures dropped 23 cents, or 0.5 percent, to $48.58 a barrel.

U.S. stockpiles probably rose 900,000 barrels in the week ended Jan. 2, from 318.7 million the week before, according to the median forecast of 10 analysts surveyed by Bloomberg News. Oil rose earlier amid OPEC supply cuts and conflicts between Russia and Ukraine and in the Middle East.

“This rally feels like it’s beginning to run out of steam,” said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. “It’s primarily been a geopolitically based rally over the past week and a half. We might be a little overcooked here and due for a correction.”

Oil rose 38 percent from Dec. 24 to Dec. 5, and traders who bought when oil was cheaper may be selling to collect their profits, triggering sell orders, said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago.

‘Way Overpriced’

“The market is way overpriced at this point,” Flynn said. “Fifty dollars is probably a pretty good psychological resistance point, and once it broke through, it started to drop.”

Fed officials believed “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial,” according to the minutes of the Dec. 15-16 Federal Open Market Committee meeting released yesterday in Washington. The FOMC discussed setting an inflation target to discourage expectations that price increases will slow “below desired levels.”

Economic growth declined in the third quarter at the fastest rate since 2001 as unemployment rose and home values, housing starts, auto production and consumer spending fell. Analysts downgraded forecasts last month, with economists at Morgan Stanley and JPMorgan Chase & Co. predicting a contraction in gross domestic product of about 6 percent for the fourth quarter, the biggest decline in 26 years.

Inventory Report

The U.S. Energy Department is scheduled to release its weekly report on inventories of crude oil and fuels at 10:30 a.m. today in Washington.

OPEC, supplier of more than 40 percent of the world’s oil, cut output 1.5 percent in December to the lowest in 16 months to counter the first annual drop in prices since 2001, a Bloomberg News survey showed today.

Production averaged 30.64 million barrels a day last month, down 475,000 barrels a day from a revised November figure of 31.11 million, according to the survey of oil companies, producers and analysts. Saudi Arabia made most of the cuts.

“I think there’s potential for crude oil to rally throughout 2009 in comparable fashion to what it did in 2007, with a similar background of OPEC production cuts driving the market higher,” said Tim Evans, energy analyst with Citi Futures Perspective in New York.

Oil prices rose 57 percent in 2007 and fell 54 percent last year.

Gazprom

OAO Gazprom cut gas deliveries to Europe through Ukraine to less than one-third of normal, a NAK Naftogaz Ukrainy spokesman said. Russia and Ukraine blamed each other for the cuts as gas shipments from Gazprom through Ukraine plummeted and deliveries to the Balkans were halted.

“Russia continues to play hardball with Ukraine on the natural gas contract,” said Olivier Jakob, managing director of Petromatrix GmbH in Zug, Switzerland. “If a solution for a return to normality is not found very quickly, this should result in incremental demand on fuel oil, naphtha, heating oil to substitute for the missing natural gas.”

Limited natural-gas supplies to eastern and central Europe from Russia helped fuel a rally to a five-week high in gasoil prices as temperatures across Europe fell to below freezing. Gasoil is the common name for heating oil outside North America.

Gasoil Rally

Gasoil for immediate loading in the Amsterdam-Rotterdam- Antwerp area, Europe’s oil-trading hub, rose $46.25, or 10 percent, to $520.25 a metric ton in London yesterday, according to data compiled by Bloomberg. That’s the highest since Nov. 28. Heating oil futures in the U.S., where temperatures are forecast to drop in the Northeast, rose as much as 5.9 percent.

Brent crude oil for February settlement rose 91 cents, or 1.8 percent, to $50.53 a barrel on London’s ICE Futures Europe exchange. It was highest close and the first settlement above $50 a barrel since Nov. 28.

The conflict between Russia and Ukraine “really reinforces this notion that the West needs to be concerned about the security of energy supplies coming from Russia,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut.