Wednesday, October 15, 2008

Oil ends at 13-month low

Oil prices sank Wednesday as investors saw further signs of economic weakness and worried that a U.S. recession could kill demand for fuel.

U.S. crude for November delivery ended the day down $4.09 to $74.54 a barrel, the lowest settlement since Aug. 31, 2007 when the front-month contract closed at $74.04 a barrel.

Oil investors have been concerned about falling demand since crude futures peaked at a record $147.27 a barrel in mid-July.

As the economy slows energy spending is often among the first areas where consumers and businesses cut back, according to analysts.

"Indeed, the U.S. economy appears to be in a recession," San Francisco Fed president Janet Yellen told financial executives on Tuesday night.

"If you go back over the last 30 or 40 years, you see no example of a recession without lower oil prices," said James Williams, energy economist with WTRG Economics in Arkansas.

Some of that demand loss may be permanent, according to Williams.

"If you traded in your 10-year-old SUV for a Prius (hybrid), you can drive the same amount, and you're going to use less gasoline and thus less oil," he said. "Consumption is reduced for the lifetime of that Prius."

Economic worries: A report released Wednesday showed that U.S. retail sales fell 1.2% in September, nearly twice the 0.7% decline economists expected, and the largest drop in three years.

The retail sales report, which accounts for about half of all consumer spending, the other half being spending on services, will weigh heavily on the current quarter's gross domestic product (GDP), according to Robert Brusca, economist with FAO Economics in New York.

The GDP, the sum of all goods and services produced, is calculated each quarter by the Commerce Department. A recession is loosely defined as two or more consecutive quarters in which the country's GDP contracts.

"It looks like we're going to get a pretty negative GDP number in the quarter," said Brusca.

The economic slowdown is spreading to Europe and Japan as well, he added.

In her Tuesday speech, Yellen pointed to economists surveyed by the Blue Chip Economic Indicators, who predicted three consecutive quarters of negative GDP readings starting with the third quarter.

On a brighter note, U.S. and international efforts to shore up the ailing banking system and keep money flowing through the economy appear to be having an impact as credit markets continue to thaw.

However, Fed chairman Ben Bernanke warned Wednesday that even if bank confidence returns to normal, the economy will take a while to recover.

Predicted surplus: Investors were also concerned about a possible build-up in crude supplies - an indicator of lower crude demand from refineries in the U.S.

The official government report that details crude, gasoline, and distillate inventories, as well as demand, is scheduled for release Thursday at 11 a.m. ET. The report is delayed due to the Columbus Day holiday.

Analysts polled by Platts, the energy research division of McGraw-Hill, expect to see a 3.1 million barrel build-up in crude stockpiles, even though more than half of production in the Gulf of Mexico remains offline in the wake of this year's hurricane season.

No comments:

 

Copyright 2007 All Right Reserved. shine-on design by Nurudin Jauhari. and Published on Free Templates