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

Bloomberg

 

By Mark Shenk

Jan. 8 (Bloomberg) — Crude oil fell for a third day as the weakening equity markets and rising number of jobless workers intensified concern that the recession will cut fuel use.

The number of Americans collecting unemployment benefits surged to a 26-year high as the labor market worsened in the world’s biggest energy-consuming country. Oil also followed stock markets in the U.S., Europe and Asia lower. U.S. crude supplies rose to the highest since May last week, a government report showed yesterday.

“The market is sensitive to any bearish news,” said James Ritterbusch, president of Ritterbusch & Associates, a Galena, Illinois, energy consultant. “It’s sensitive to the jobs number, the stock market and yesterday’s decidedly bearish statistics. There will have to be a significant worsening of geopolitical factors before the market rebounds.”

Crude oil for February delivery fell $1.19, or 2.8 percent, to $41.44 a barrel at 10:27 a.m. on the New York Mercantile Exchange. Oil is down 57 percent from a year ago.

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.

“Inventory gains and bad economic news are outweighing promises and comments from OPEC,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts.

Royal Dutch Shell Plc resumed contracted deliveries of Nigeria’s Bonny, Bonga and Forcados crude-oil grades after production was cut by pipeline attacks.

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 price of oil for delivery in January 2010 is 41 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.”

Brent crude oil for February settlement fell 86 cents, or 1.9 percent, to $45 a barrel on London’s ICE Futures Europe exchange.

Brent Premium

The price of Brent oil in London is more than $3 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.

To contact the reporter on this story: Mark Shenk in New York at[email protected].

Last Updated: January 8, 2009 10:56 EST

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