Oil Falls a Third Day on Concern the Recession Will Cut Demand

Jan. 8 (Bloomberg) -- Crude oil fell for a third day as the rising number of jobless workers in the U.S. intensified concern that the recession will cut fuel use in the world’s biggest energy-consuming country.

Oil dropped as much as 4.9 percent after a report showed that the number of people getting unemployment benefits surged to a 26-year high. The Labor Department tomorrow may say that the jobless rate climbed to 7 percent, a survey showed. U.S. oil stockpiles rose last week, the government said yesterday. Natural gas supplies declined less than forecast in a report today.

“Fears about what tomorrow’s employment numbers will show are sending shudders through energy markets,” said John Kilduff, senior vice president of risk management at MF Global Inc. in New York. “Rising fuel supplies in yesterday’s report and the weak showing for natural gas today show the severe impact of the economic situation on energy demand.”

Crude oil for February delivery fell 93 cents, or 2.2 percent, to settle at $41.70 a barrel at 2:44 p.m. on the New York Mercantile Exchange, the lowest since Dec. 30. Oil is down 57 percent from a year ago.

The government may report tomorrow that the economy lost another 510,000 jobs in December, bringing the 2008 total to a six-decade high of 2.4 million, according to economists surveyed by Bloomberg News.

The oil market “will be driven by the economy,” Harry Tchilinguirian, senior oil market analyst at BNP Paribas SA in London, said on Bloomberg TV. “We’re looking at a picture that will be extremely weak, especially in the manufacturing side, in the first half of the year.”

Attacks on Israel

Prices rose as much as 2.4 percent to $43.63 earlier today as rocket attacks on Israel launched from Lebanon spurred concern that the widening conflict in Gaza will disrupt Middle East supplies, and as Venezuela and Angola signaled compliance with the Organization of Petroleum Exporting Countries’ production cuts agreed to last month.

Volume in electronic trading on the exchange was 537,132 contracts as of 3:24 p.m. in New York. Volume totaled 612,862 contracts yesterday, up 29 percent from the average over the past 3 months. Open interest yesterday was 1.22 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.

U.S. Inventories

U.S. crude-oil inventories rose 6.68 million barrels to 325.4 million barrels last week, the Energy Department said yesterday in a weekly report. Supplies at Cushing, Oklahoma, where oil that’s traded on Nymex is stored, climbed 14 percent to 32.2 million barrels, the highest since at least April 2004, when the department began keeping track of supplies there.

“The very bearish DOE report yesterday is the main focus of the market despite the bombs that are falling on Gaza this week,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The question will be OPEC. There will be a focus on the usual suspects, Iran and Venezuela.”

The price of oil for delivery in February 2010 is 44 percent more than for the current month, increasing the opportunity for traders to profit from storing crude for later use. This structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

“Inventories are getting squirreled away because of both the wide spread and also in anticipation that the market will tighten through the year as OPEC cuts back,” said Tim Evans, energy analyst with Citi Futures Perspective in New York. “Putting extra barrels away seems a prudent game plan here.”

Russian Gas

Prices also fell on speculation that OAO Gazprom, Russia’s natural-gas exporter, will resume fuel shipments to Europe through Ukraine and because of the government report showing that U.S. natural-gas supplies dropped by less than expected.

The flow of Russian gas will start as soon as international monitors are deployed, Chief Executive Officer Alexei Miller said. Ten gas-consuming nations have agreed to join a committee to monitor flows of Russian gas through Ukraine, Miller told reporters in Brussels today.

“Russia can’t ignore the export earnings that are being missed and they don’t want to lose what little credibility they have left,” Mueller said. “They don’t want their European customers to look aggressively at the LNG option or pipelines from Algeria.”

U.S. supplies of natural gas, a competing fuel, declined 47 billion cubic feet to 2.83 trillion cubic feet last week, the Energy Department said today in Washington. Inventories were forecast to fall 78 billion cubic feet, according to a survey of analyst estimates compiled by Bloomberg News.

Natural Gas

Natural gas for February delivery fell 28.9 cents, or 4.9 percent, to settle at $5.583 per million British thermal units in New York.

Brent crude oil for February settlement fell $1.19, or 2.6 percent, to settle at $44.67 a barrel on London’s ICE Futures Europe exchange.

The price of Brent oil in London is $2.97 higher than crude traded in New York. The difference makes it profitable to divert oil from Africa, the Middle East and other sources to European ports. Profiting from the disparity in prices is known as arbitrage.

“Given the arbitrage, any spare cargo of oil, such as what is now loading in Nigeria, is going to Europe,” Evans said.