Demand Concerns Lead to 7% Fall in Crude Oil Futures

Crude-oil futures slumped nearly 7% Tuesday, paring much of the strong gains of the previous session, as traders' concerns over a slowdown in energy demand weighed on prices.

Stocks on Wall Street also gave up some of their gains from the previous two sessions. Crude for January delivery finished down $3.73, or 6.8%, to $50.77 a barrel on the New York Mercantile Exchange. It dropped to an intraday low of $50.52 earlier.

Weekly data on crude-oil inventories, due out Wednesday, are expected to show rising supplies.

"Demand concerns once again returned to the forefront," wrote Nimit Khamar, analyst at Sucden Research, in a note to clients.

Worries that the economic slowdown will further cut into oil demand have continued to undermine prices. The Commerce Department reported early Tuesday that the U.S. economy contracted at a 0.5% annual rate in the third quarter, worse than the 0.3% rate initially estimated a month ago.

The U.S. is the world's largest user of oil, accounting for nearly a quarter of global consumption.

"The downward revision in the third-quarter GDP number brings the market back to the reality that the recession will continue to put a damper on demand," said James Williams, economist at WTRG Economics.

Crude had rallied more than 9% to start the week, marking the biggest one-day percentage gain in nearly three weeks, amid what analysts called "euphoria" over the U.S. government's bailout of embattled financial-services giant Citigroup, but this gave way to traders taking profits on Monday's surge.

"There was little to really justify yesterday's increase except for a weaker dollar," Williams said.

In foreign-exchange trading Tuesday, the dollar index which tracks the value of the greenback against its major rivals, lost 1% as market participants played off fresh moves by the Federal Reserve to stimulate lending in the U.S. economy.

A falling dollar tends to add downward pressures on dollar-denominated oil prices.

Also in Nymex trading, December reformulated gasoline dropped 3.4% to end at $1.12 a gallon, while December heating oil fell 4.5% to $1.71 a gallon, while December natural gas was down 3.3% to trade at $6.66 per million British thermal units. The December contract expires Tuesday. Natural gas for January delivery slumped 6.4% to end at $6.39 per million British thermal units.

More economic data to be released on the eve of the Thanksgiving holiday are "likely to further highlight the gloomy economic conditions faced by the U.S.," Khamar said.
Also Wednesday, the government's Energy Information Administration will release the latest week's data on U.S. petroleum inventories and demand. Last week, the EIA said demand for motor gasoline over the four weeks ended Nov. 14 dropped 2.2% from a year ago.

Analysts surveyed by Platts, an energy information provider, expect crude inventories to have increased 400,000 barrels last week. They also expect a buildup in gasoline stocks of 300,000 barrels for the week as well as a drawdown of 900,000 barrels in distillate stocks.

The EIA's also scheduled to release weekly data on natural-gas inventories on Wednesday, a day early because of Thanksgiving. Analysts surveyed by Platts gas in storage to have dropped by between 43 and 48 billion cubic feet last week.

Energy traders also have on their radar screens the upcoming meetings of the Organization of Petroleum Exporting Countries. The oil cartel's scheduled to meet Saturday in Egypt followed by a gathering Dec. 17 in Algeria.

OPEC President Chakib Khelil had said that the cartel should cut production by 1 million barrel a day at the meetings, but some analysts said OPEC is still well behind the curve.

The cartel's "playing a frantic game of 'catch-up' in a market that is more than well supplied," said Edward Meir, an analyst at MF Global.

In other news Tuesday, U.S. average gasoline prices fell below $1.90 a barrel, according to the AAA Daily Fuel Gauge Report. The current average price stands at $1.89 a gallon, down from $1.91 on Monday.

A month ago, gasoline sold for $2.70 a gallon. A year ago, it retailed for $3.09 a gallon.

Author: Jo Amey