Friday, October 10, 2008

Oil sheds more than $9 to hit 13-month low

Oil prices plunged to a 13-month low Friday, following steep stock market declines, as investors worried that the weakening global economy was driving down demand for fuel worldwide.

U.S. crude for November delivery sank as much as $9.50 to a low of $77.09 a barrel during Friday trading, its lowest level since Sept. 11, 2007, when crude hit an intraday low of $77.00.

Prices later recovered slightly to settle down $8.89 to $77.70 a barrel in New York, oil's lowest close since Sept. 10, 2007, when crude ended the day at $77.49.

Friday's plunge was the third largest dollar amount on record following a fall of $10.56 on Jan. 17, 1991, prompted by the launch of Operation Desert Storm, and $10.56 just over a week ago on Sept. 29 after the House made its first attempt to pass the $700 billion bailout plan to shore up the economy.

Investors remain concerned that a crumbling economy is causing businesses and consumers to cut back on fuel consumption.

During Friday trading the Dow Jones industrial average lost nearly 700 points before recovering to add about 150 points, or about 1.7%.

If oil ends the day below $80 a barrel, crude prices could slide even further in the coming weeks, according to James Cordier, founder of OptionSellers.com in Florida.

"People have to remember oil used to trade for the longest time at $35 to $40 a barrel," said Cordier, referring to prices not seen since 2004. "The consumption that we saw back then, we could see it again."

Worries about the economy have weighed heavily on the world markets this week. Stocks and commodities have all fallen in the United States since Monday as the euro sank to fresh lows against the dollar, and U.S. treasury bonds, often considered a safe haven in times of economic strife, were extremely volatile.

As the world economy weakens and money becomes tight, energy expenditures are often among the first to be cut, according to analysts.

"Factories are closing, jets are on the ground, a lot of the expansion in China and India are probably going to be curtailed," said Cordier.

In an effort to encourage banks to loosen their lending practices and get cash flowing again, the Federal Reserve and central banks in Europe simultaneously cut interest rates this week, on top of a host of other measures.

As energy prices fall, oil and natural gas companies will likely be forced to cut back production, according to Tom Orr, head of research with Weeden & Co. in Connecticut.

"Production starts to become un-economic because costs are rising," Orr said. "They just don't have any access to liquidity."

Falling demand: As the economic crisis worsened, the Energy Department registered a sharp drop in demand for gasoline.

On Wednesday the government reported a 5.3% decline in demand for motor gasoline over the four weeks ended Oct. 3, compared to a year earlier.

The government also said supplies of crude in the United States grew by 8.1 million barrels last week, an indicator that oil use is dropping.

Meanwhile the International Energy Agency, citing financial turmoil, slashed global demand growth forecasts for 2008 and 2009 to 0.5% and 0.8% respectively.

In the U.S., falling demand helped drive gas prices down from a national average of $4.114 a gallon in mid-July, according to motorist group AAA. Over that same period, crude oil prices have also fallen more than 40% from an all-time high of $147.27 a barrel.

By Friday, gas was selling at an average of $3.35 a gallon, AAA reported.

OPEC response: The rapid decline in crude prices has sent officials from the Organization of Petroleum Exporting Countries into crisis mode.

The organization that manages oil prices and production levels for major international oil producers, such as Saudi Arabia and Venezuela, called Thursday for an "extraordinary" meeting to be held Nov. 18 in Vienna to deal with the economic crisis's impact on crude prices.

Analysts believe the cartel intends to cut production in order to keep prices from plummeting. But unless they cut production dramatically, "the power of the global recession is going to greatly supercede what they can do," Orr said.

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