Wednesday, October 22, 2008

Oil Falls to 16-Month Low, Gasoline Tumbles, as Demand Declines

By Mark Shenk

Oct. 22 (Bloomberg) -- Crude oil fell more than $5 a barrel to a 16-month low and gasoline tumbled as weakening fuel consumption outweighed prospects of a production cut by OPEC at a meeting this week.

U.S. fuel demand during the past four weeks was down 8.5 percent from a year ago, an Energy Department report today showed. The financial crisis that's curbed the nation's energy use is spreading to emerging markets. OPEC will decide on Oct. 24 to lower output by at least 1 million barrels a day, according to a Bloomberg News survey.

``The market is more concerned about the economy than anything else,'' said Tom Bentz, senior energy analyst at BNP Paribas in New York. ``Until there is a recovery of the financial system and the economic picture, oil will trend lower, even if OPEC makes a cut of 1 million barrels plus.''

Crude oil for December delivery declined $5.43, or 7.5 percent, to $66.75 a barrel at 2:42 p.m. on the New York Mercantile Exchange, the lowest settlement since June 13, 2007. Prices, which have tumbled 55 percent since reaching a record $147.27 on July 11, are down 24 percent from a year ago.

Gasoline for November delivery declined 12.1 cents, or 7.2 percent, to $1.5709 a gallon in New York, the lowest settlement since Feb. 12, 2007.

Pump prices are following futures lower. Regular gasoline, averaged nationwide, declined 3.1 cents to $2.858 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices have tumbled 31 percent from the record $4.114 a gallon reached on July 17.

Emerging Markets

Argentina's planned seizure of $29 billion of private pension funds stoked concern the nation is heading for its second default in a decade. President Cristina Fernandez de Kirchner's decision hurt markets already reeling from slumping commodity prices and slower growth.

China's gross domestic product increased 9 percent in the third quarter from a year earlier, the weakest pace in five years, as the global slowdown saps demand for Chinese products. China is the world's biggest oil consumer, after the U.S.

``I think the economic news from Asia is knocking the last leg from under the bulls,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``We're now getting evidence that China isn't immune to the financial crisis after all.''

Energy prices also fell because the euro sank to almost a two-year low against the dollar as stock markets declined around the world. The euro dropped 1.8 percent to $1.2831 from $1.3063 yesterday, after touching $1.2743, the lowest since Nov. 7, 2006.

U.S. Fuel Consumption

Fuel demand in the U.S. averaged about 18.7 million barrels a day during the four weeks ended Oct. 17, according to today's Energy Department report. Consumption in the four weeks ended Oct. 10 was the lowest since June 1999.

``The projections of a deep economic slowdown are scary,'' said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``Demand for every segment of the oil barrel is going to take a hit.''

U.S. gasoline demand averaged 8.8 million barrels a day over the past four weeks, down 4.3 percent from the same period last year, the report showed. Consumption of distillate fuel, a category that includes heating oil and diesel, averaged 3.9 million barrels a day, down 5.8 percent.

``The industrial slowdown will reduce use of diesel, people will cut back on discretionary driving, hitting gasoline demand, there will be less travel, hitting jet fuel demand, and there will be less shipping, which hits bunker-fuel demand,'' Mueller said.

Stockpile Increase

Crude oil inventories rose 3.18 million barrels to 311.4 million barrels, the report showed. It was the fourth-straight increase. A gain of 2.65 million barrels was forecast, according to the median of responses in a Bloomberg News survey. Supplies of gasoline and distillate fuel also rose.

The Organization of Petroleum Exporting Countries may disregard pleas from oil-consuming nations on the brink of recession and cut output this week, a Bloomberg survey showed.

``The question of reduction has to be discussed,'' Algerian Oil Minister and OPEC President Chakib Khelil said in Vienna. ``Stocks are very high, there is excess of supply, some of us are not able to sell their crude.''

Thirty of 33 analysts surveyed this week forecast that OPEC will lower production by 1 million barrels a day or more at the meeting, which was brought forward from November. That's more oil than Australia consumes. OPEC also may signal plans for an additional reduction by early 2009.

Brent crude oil for December settlement fell $5.20, or 7.5 percent, to $64.52 a barrel on London's ICE Futures Europe exchange, the lowest settlement since May 7, 2007.

Airlines Benefit

Energy stocks are tumbling as airlines rally because of falling energy futures. Exxon Mobil Corp., the world's largest oil company, dropped $6.93 to $64.57. Chevron Corp., the second- largest U.S. oil company, fell $5.06 to $61.74.

American Airlines parent AMR Corp. rose 84 cents to $11.97. United Airlines parent UAL Corp. increased 85 cents to $14.65.

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