Oil languishes near $35 on weakening US economy

[January 16, 2009]  VIENNA, Austria (AP) -- A weakening U.S. economy and falling global demand kept oil prices near $35 a barrel Friday -- about 30 percent off last week's highs.

The softness of the crude market was underscored by an International Energy Agency report predicting that demand will fall for the second straight year in 2009 -- the first two-year decline in 26 years.

Light, sweet crude for February delivery was down 6 cents at $35.34 a barrel by noon in Europe in electronic trading on the New York Mercantile Exchange. The contract fell $1.88 overnight to settle at $35.40, after trading as low as $33.20, a five-year low.

Oil prices have fallen about 30 percent since touching $50.47 a barrel last week as dismal economic and corporate results stoked investor fears that a drop-off in crude demand may be worse than expected.

Concerns center on the U.S., the world's largest consumer of oil, where falling consumer demand and rising unemployment are undermining demand for crude -- and spilling over to the rest of the world.

In its highly watched monthly survey Friday, the International Energy Agency predicted that the worsening global economy will leave demand at 85.3 million barrels a day -- 0.6 percent lower than 2008. Demand last year is estimated to have slid 0.3 percent.

The IEA says it lowered its forecast because it has nearly halved its estimate for global economic growth to 1.2 percent.

In the U.S., the Labor Department reported Thursday that first-time requests for unemployment insurance jumped to a seasonally adjusted 524,000 in the week ending Jan. 10. Analysts had expected 500,000 new claims. The department last week said the unemployment rate jumped to 7.2 percent in December, a 16-year high.

Corporate news was not much better, with the U.S. government forced to bail out the country's largest lender, Bank of America, to keep it from collapse.

"Market pessimism about the international economic outlook is still weighing on the oil price," said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney. "History has shown that these things can move more than you anticipate."

U.S. petroleum deliveries -- a measure of demand -- fell 6 percent to 19.4 million barrels a day last year, with declines for all major products made from crude, according to the American Petroleum Institute.

The Organization of Petroleum Exporting Countries has also lowered its energy demand forecast for 2009, saying in its January report that it expects world demand for crude will fall 180,000 barrels per day in 2009 from the previous year.

"All eyes are focused on demand," said Gavin Wendt, head of mining and resources research at consultancy Fat Prophets in Sydney. "Markets are looking for some sort of indication of demand stability, and they aren't getting that yet."

OPEC has announced 4.2 million barrels a day of production cuts since September, moves that investors have so far ignored. But markets may be anticipating those output cuts will start to tighten oil supplies later in the year, Moore said.

The May contract trades at $50.82 a barrel, with the September contract at $55.90.

"The OPEC production cuts are going to take time to widdle away the build up in inventories," Moore said. "But if compliance is high, that could support prices looking further out."

The wild card is oil producers outside OPEC -- whether they increase output and if so, how much that will compensate for reduced supplies from OPEC nations.

Noting that Moscow planned to lower the duty on oil exports, Vienna's JBC Energy said: "As this will increase the profitability of exports, Russia could ship higher volumes in February."

In other Nymex trading, gasoline and heating oil futures slipped by less than a penny to $1.17 and $1.49 a gallon, while natural gas for February delivery rose by nearly 5 cents to $4.90 per 1,000 cubic feet.

[Associated Press; By GEORGE JAHN]

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

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