Oil below $42 on dismal US economic outlook

[January 30, 2009]  VIENNA, Austria (AP) -- Caught between dismal U.S. economic numbers and news of possible further OPEC cuts, oil prices hovered Friday near their previous close below $42 a barrel.

Investors remained timid ahead of a U.S. Commerce Department report, which is expected later Friday to show the economy shrank at a annualized pace of 5.4 percent in the October-December period -- much faster than the 0.5 percent decline logged in the prior quarter.

If economists' forecasts are correct, the report would mark the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through a severe recession.

Light, sweet crude for March delivery rose 35 cents to $41.79 a barrel by midafternoon in European electronic trading on the New York Mercantile Exchange. The contract fell overnight 72 cents to settle at $41.44 on grim U.S. news about manufacturing, housing and unemployment.

The Commerce Department said Thursday orders to U.S. factories for big-ticket manufactured goods fell by 5.7 percent in December, the fifth straight monthly drop, while sales of new homes plunged 14.7 percent last month, the slowest monthly pace on record.

Meanwhile, the Labor Department said a record 4.78 million people claimed unemployment insurance for the week ending Jan. 17. As a proportion of the work force, the tally of unemployment recipients is the highest since August 1983.

The deteriorating global economy has forecasters lowering expectations. The International Monetary Fund predicted global economic growth will slow to 0.5 percent in 2009, down from a November prediction of 2.2 percent.

"It certainly does appear that the financial crisis has hit harder than people first thought it would," said Gerard Rigby, an energy analyst with Fuel First Consulting in Sydney.

Oil prices, which have fallen about 72 percent since peaking near $150 in July, have traded in the mid-$30s and high-$40s since mid-December.

U.S. storage facilities are awash in surplus crude. Storage tanks in the United States are housing more than 338.9 million barrels of crude oil, up from 15.7 percent from a year ago, according to the Energy Information Administration. Trader and analyst Stephen Schork, in his Schork Report, forecast that "supplies will only continue to improve over the next couple of months" as the high-demand winter season ends.

Still, some 4.2 million barrels of output cuts announced by the Organization of Petroleum Exporting Countries since September have helped to support prices. On Thursday, OPEC Secretary General Abdalla Salem El-Badri said the group could slash production again if needed.

"The cuts have helped put a floor in prices," Rigby said. "If they're being disciplined about the previous cuts, OPEC doesn't need to cut again."

El-Badri said he expected global oil demand to pick up by the end of this year or the beginning of next year. Rigby said demand could start to recover by next quarter, with prices jumping to above $50 a barrel.

"I think we'll see an improvement after this quarter," Rigby said. "I can't see the whole year being written off. As soon as traders see demand stabilize, the price will go up."

In other Nymex trading, gasoline futures rose 1 cent to $1.24 a gallon. Heating oil gained 2 cents to $1.45 a gallon while natural gas for March delivery fell 1 cent to $4.56 per 1,000 cubic feet.

In London, the March Brent contract jumped 84 cents to $46.24 on the ICE Futures exchange.

[Associated Press; By JAKE NEUBACHER]

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

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