Oil falls below $38, reversing big overnight gain

[February 20, 2009]  LONDON (AP) -- Oil prices fell below $38 a barrel Friday as tumbling stocks and weak economic data reminded investors that crude demand is likely to soften further.

Profit-taking also weighed on prices, which had spiked higher overnight on reports of much lower-than-expected U.S. inventories.

Light, sweet crude for March delivery fell $1.68 cents to $37.80 a barrel by midday in Europe in trading on the New York Mercantile Exchange. The contract on Thursday surged $4.86, or 14 percent, to settle at $39.48.

Because the March contract is due to expire Friday, most trading volume was with the April contract, which fell 1.38 cents to $38.80 after jumping $2.77 to settle at $40.18.

The jump in prices on Thursday was fueled by an Energy Information Administration report that showed crude stocks decreased 200,000 barrels for the week ended Friday.

Analysts had expected stocks to grow by 3.5 million barrels, according to Platts, the energy information arm of McGraw-Hill Cos. Inventories have risen more than 30 million barrels in the prior six weeks.

The report's four-week moving average showed that gasoline consumption rose 0.8 percent.

Despite the surprise fall in crude stocks, investors were skeptical of a sustained recovery in crude demand.

"It was a significant move last night, but there's not much out there that can create a bullish story," said Toby Hassall, an analyst with Commodity Warrants Australia in Sydney. "The demand outlook is very weak, and there's nothing to suggest that it will improve in the near term."

Some evidence from Thursday suggested demand remained poor. The Department of Transportation said Thursday that motorists drove 3.8 billion fewer miles in December than they did a year earlier. The 1.6 percent fall in driving marks the 14th consecutive monthly decline.

Rising U.S. joblessness continues to drag on demand amid the worst recession in decades. The Labor Department said Thursday that the number of people receiving unemployment benefits jumped to an all-time high near 5 million, while new jobless claims remain well above 600,000.

Crude investors look to stock markets for sense of overall sentiment on the economy, and the Dow Jones industrial average fell to a six-year low Thursday, sliding 1.2 percent. Most European and Asian stock indexes also fell on Friday.

The Organization of Petroleum Exporting Countries has pledged to cut 4.2 million barrels a day since September, and the group's leaders have said recently they may reduce output more at a meeting on March 15.

Investors have so far brushed off OPEC supply cuts, sending prices down about 73 percent from a record 147.27 in July.

"What OPEC is encountering is a very significant drop in demand in the last six months," Hassall said. "Another big cut might support prices, but they're mindful that they don't want a surge in prices to slow down a recovery."

In other Nymex trading, gasoline futures fell 3.66 cents to $1.06 a gallon. Heating oil dropped 4.15 cents to $1.16 a gallon, while natural gas for March delivery slid 4.1 cents to $4.04 per 1,000 cubic feet.

In London, the April Brent contract fell $1.12 to $40.87 on the ICE Futures exchange.

[Associated Press; By CARLO PIOVANO]

Associated Press writer Alex Kennedy in Singapore contributed to this report.

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