Oil falls to below $42 a barrel

[January 02, 2009]  LONDON (AP) -- Oil prices fell below $42 a barrel Friday after Russia and Ukraine said a dispute over natural gas payments wouldn't affect shipments to Western Europe.

Light, sweet crude for February delivery fell $2.85 to $41.75 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. Trading was closed Thursday for New Year's Day.

The contract rose $5.57 on Wednesday, the last trading day of 2008, to settle at $44.60 after Russia threatened to cut off natural gas supplies to Ukraine. Russia followed through with that threat Thursday, though both countries pledged they would keep supplies to the rest of Europe flowing.

On Friday, Russia continued to withhold supplies to Ukraine as talks between the two remained suspended, according to Russian media reports. No interruptions outside Ukraine were reported.

Analyst Olivier Jakob of energy analysis firm Petromatrix in Switzerland said that Ukraine has enough reserves to avoid an immediate risk to its supplies, as long as both parties find an agreement by the end of next week.

"If there is a disruption in natural gas supplies to Europe, then you will see an increase in the usage of oil instead of natural gas. It will have an impact on oil prices," Jakob said.

Russia's gas monopoly Gazprom shut off gas supplies after talks broke down over Ukraine's payments for past shipments and a new price contract for 2009. Gazprom said it had boosted natural gas deliveries through other pipelines to Western Europe.

The European Union depends on Russia for about a quarter of its gas, with some 80 percent of that delivered through pipelines controlled by Ukraine.

Concerns that the week-old conflict between Israel and Hamas in Gaza could disrupt supplies in the oil-rich Middle East helped keep prices from falling further. Israeli troops massed on the Gaza border Thursday in preparation for a possible ground offensive.

Oil prices began 2009 the same way they spent the most of the second half of 2008 -- going down. Crude peaked at $147.27 a barrel in July before plummeting to as low as $33.87 on Dec. 19.

Prices fell 54 percent last year after soaring 57 percent in 2007.

Investors remain focused on the slowing global economy and its potential impact on crude demand. The Department of Energy said earlier this week that U.S. fuel consumption fell 3.7 percent in the four weeks ended Dec. 26 from a year earlier.

In other Nymex trading, gasoline futures fell 6.20 cents to $1.00 a gallon. Heating oil dropped 5.57 cents to $1.39 a gallon while natural gas for February delivery slid 4.7 cents to $5.58 per 1,000 cubic feet.

In London, February Brent crude fell $2.72 to $42.87 a barrel on the ICE Futures exchange.

[Associated Press; By LOUISE WATT]

AP writer Alex Kennedy contributed to this report from Singapore.

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