Oil falls near $38, following stock markets down

[February 24, 2009]  VIENNA (AP) -- Ten-year lows for U.S. stock indexes dragged oil prices to levels near $38 a barrel Tuesday as a loss of investor confidence in global economic recovery swept across markets.

U.S. stocks fell to the lowest point since 1997 on Monday on investor fear that a government stimulus package and plan to rescue ailing banks won't keep the worst recession in decades from deepening.

Despite an unexpected fall in last week's crude inventories, benchmark crude for April delivery dropped 5 cents to $38.39 a barrel by midday in Europe on the New York Mercantile Exchange. The contract overnight fell $1.59 to $38.44.

Months of dismal economic news, highlighted by massive job cuts, have weighed on the psyche of investors and undermined faith that the economy will recover in the second half.

The Dow Jones industrial average fell 3.4 percent Monday and the Standard & Poor's 500 index dropped 3.5 percent.

All major Asian stock markets also fell on Tuesday.

"The stock and crude markets are reflecting the same negative sentiment about the broader economy," said Gerard Burg, minerals and energy economist with National Australia Bank in Melbourne.

Even large output reductions by the Organization of Petroleum Exporting Countries have failed to boost prices. OPEC has announced 4.2 million barrels a day of production cuts since September, and the group's leaders have said it's likely the 13-member cartel will cut more supply at a meeting on March 15.

"There's relatively little that further production cuts can do," Burg said. "They've already cut a sizable amount of their production."

Some analysts see OPEC's production cuts as a necessity to counter rising stocks. "This reduction in supply is desperately needed to reduce the huge stock levels that have been building around the globe in recent month," according to a report by Vienna's JBC Energy.

Though U.S. crude inventories declined for the week ending February 20, a report by the EIA on Wednesday is expected to show stocks rebounded by around one million barrels, said JBC.

The fall in oil prices -- crude has plummeted 74 percent since July -- may itself eventually trigger a rally, as producers of high-cost fields shut down operations to avoid losses.

"Some producers are probably struggling to be profitable, and that puts a constraint on the downside," Burg said. "It puts a very real floor in place."

Burg said he expects oil to trade between $35 and $45 a barrel for the next few months.

In other Nymex trading, gasoline futures and heating oil rose 1 cent to $1.05 and $1.18 a gallon. Natural gas for March delivery slid 7 cents to $4.02 per 1,000 cubic feet.

Brent prices rose 31 cents to $41.30 on the ICE Futures exchange in London.

[Associated Press; By JAKE NEUBACHER]

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

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