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Oil Falls Below $50 for First Time in 22 Months on Demand Slump
By Mark Shenk and Grant Smith
Nov. 20 (Bloomberg) -- Crude oil fell below $50 a barrel in New York for the first time in almost two years as a recession in the U.S., Europe and Japan cut global energy demand.
Oil has dropped nearly $100 from its July record as the world economic crisis reduced global demand growth to its weakest in 23 years. Crude oil’s continuing slide will add to concern that the U.S. economy faces deflation, threatening investment in oil and gas production projects.
“The news in the economic sphere keeps getting worse, which is putting pressure on the oil market,” said
Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “There is little that you can point at on the bullish side.”
Crude oil for December delivery fell $2.75, or 5.1 percent, to $50.87 a barrel at 9:24 a.m. on the New York Mercantile Exchange, after falling as low as $49.91. The contract last declined below $50 on Jan. 18, 2007. Futures have dropped 65 percent since reaching a record $147.27 on July 11.
“Oil at $147 was purely a speculative bubble,”
Gareth Lewis-Davies, an analyst at Dresdner Kleinwort Group Ltd., said before prices breached $50. “It was cheap money chasing opportunities that were evaporating in other asset classes. What would bring it down further is any indication of demand growth being weaker than already dampened expectations.”
The International Energy Agency, an adviser to 28 nations, said last week that world oil demand will rise at its slowest pace for 23 years in 2008. It cut its 2009 estimate by 670,000 barrels a day to 86.5 million barrels a day, the biggest reduction in 12 years.
‘Contracting Sharply’
“Prices are plunging down through $50 due to the serious economic slowdown, broad-based deleveraging and risk aversion,” said
Mike Wittner, head of oil market research at Societe Generale SA in London. “Demand growth in developed countries is contracting sharply.”
New York oil futures first traded above $50 on Sept. 28, 2004, in the middle of oil’s six-year rally toward this year’s records. Prices climbed on the strength of oil import demand from emerging economies, led by China, the world’s second-largest oil consumer after the U.S.
U.S. consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947, after being unchanged the prior month, the Labor Department said yesterday. That increased concern the world’s largest economy risks a sustained period of falling prices or deflation.
U.S. gasoline purchases declined for a 30th consecutive week last week, MasterCard Inc. said on Nov. 18. China cut diesel imports to the lowest in 14 months during September, the Customs General Administration said Nov. 17.
Demand Forecasts
The IEA’s expectation that demand will expand next year is more optimistic than the outlook from several other analysts.
Ian Taylor, chief executive officer of oil trader Vitol Group, said on Oct. 28 he expects a 1 million-barrel decline in 2009, while Wood Mackenzie Consultants Ltd. predicts a drop of 250,000 barrels.
Prices may fall as low as $40 a barrel by April, Deutsche Bank AG said in a report yesterday. The Organization of Petroleum Exporting Countries potentially needs to cut production by 2.5 million barrels a day to reduce output in an oversupplied market, the note said.
OPEC, supplier of more than 40 percent of the world’s crude, has lost $700 billion in revenue because of falling prices, the British Broadcasting Corp. reported, citing Chakib Khelil, the group’s president.
OPEC Meeting
The 13-member group, due to meet on Nov. 29 in Cairo and again on Dec. 17 in Algeria, may lower output by a further 1 million barrels a day this year, extending production cuts agreed to last month, according to a Bloomberg News survey of analysts last week.
“OPEC is meeting next week but it doesn’t look like they will make an announcement there,” Mueller said. “They might make some more aggressive action when the meet in September, which could provide the market with some support.”
The drop in oil prices may cut investment. As many as 44 projects being undertaken by companies including Saudi Arabian Oil Co., Royal Dutch Shell Plc and Petroleo Brasileiro SA have been delayed or faced spending reduction, according to a Nov. 18 report by Morgan Stanley & Co.
Oil’s decline has accelerated. October’s 33 percent drop was the biggest monthly reduction since at least 1988, as fuel demand has fallen.
Brent crude oil for January settlement declined $2.05, or 4 percent, to $49.67 a barrel on London’s ICE Futures Europe exchange. Futures touched $48.20, the lowest since May 24, 2005.
To contact the reporter on this story:
Mark Shenk in New York at
[email protected];
Grant Smith in London at
[email protected].
Last Updated: November 20, 2008 09:41 EST
