Oil above $35 amid grim economic news

[February 19, 2009]  VIENNA (AP) -- Markets shrugged off a steady barrage of grim U.S. economic news to push oil prices above $35 a barrel Thursday, with a drop in the dollar encouraging investors to buy crude.

A report by the Fed predicting a sharper economic contraction and raising forecasts for unemployment was offset by a 1.1 percent drop in the dollar against the euro, to $1.2667. Oil tends to rise when the dollar drops as investors use the commodity as a hedge against inflation.

Light, sweet crude for March delivery jumped by $1.25 to $35.87 a barrel by midday in Europe on the New York Mercantile Exchange. The contract on Wednesday fell 31 cents to settle at $34.62.

The March contract expires on Friday, and traders switched their focus to the April contract, which rose 62 cents to $38.03.

Besides the boost oil prices received from the drop in the dollar, the economic news was gloomy.

The Federal Reserve on Wednesday confirmed what many investors already suspected -- that the U.S. economy has significantly deteriorated in the last few months.

The Fed said it expects the economy will contract between 0.5 and 1.3 percent this year. Its previous forecast from November had a 0.2 percent contraction as the worst case scenario.

The Fed also said the unemployment rate will likely rise to between 8.5 and 8.8 percent this year, higher than its previous forecast of between 7.1 and 7.6 percent.

The current global economic slump began in 2007 with a crisis in the U.S. sub-prime mortgage sector, and the housing market continues to buckle under the weight of surging foreclosures.

A report from the Commerce Department on Wednesday said construction of new homes and apartments plunged 16.8 percent in January from the previous month, to a seasonally adjusted annual rate of 466,000 units, a record low.

"The housing data suggests the recession is even worse than we thought," said Christoffer Moltke-Leth, head of sales trading for Saxo Capital Markets in Singapore. "We need to see the housing market stabilize because consumer sentiment is very much correlated to it."

Investors are skeptical that a $787 billion stimulus bill signed this week by President Barack Obama will spark a quick recovery. The White House on Wednesday said the government will spend $75 billion to help prevent millions of Americans from losing their homes.

The program would provide incentives to mortgage lenders to help borrowers reduce their payments in an effort to counter a souring housing market at the core of the economic crisis.

While a number of analysts said the program might limit the hemorrhaging in housing prices, the market's cool reception seemed to show how much investors have lost confidence in government bailouts.

Crude investors are also concerned a jump in oil inventories is reflecting a steep drop-off in demand.

Analysts expect crude stocks will grow by 3.5 million barrels when the Energy Department releases inventory data for the week ended Feb. 13, according to a survey by Platts, the energy information arm of McGraw-Hill Cos. Inventories have risen more than 30 million barrels in the last six weeks.

"Inventories are the focus now," said Moltke-Leth. "If they rise again, it will put more downward pressure on crude."

Net crude oil stocks rose to a 20 month high for the week ended February 6th. It was the eighteenth weekly increase out of 20.

"Bottom line, nothing has changed," said energy analyst Stephen Schork. "There is no way to construe the current fundamental picture anyway other than bearish."

The Organization of Petroleum Exporting Countries has struggled to bolster prices as output cuts fail to keep up with falling demand.

Venezuelan Oil Minister Rafael Ramirez said Wednesday the group may cut production again at a meeting on March 15, on top of the reduction of 4.2 million barrels a day announced since September. Ramirez said the 13-member cartel would like prices to rise to $70 a barrel.

"OPEC is looking very weak right now," said Moltke-Leth said. "There's a lot of chatter from them, but the market isn't really listening."

Moltke-Leth said prices will likely fall to about $32 a barrel, which would test the 10-year average price.

"$32 and a half is a significant line in the sand," he said. "It's a key support level, and I expect the market to test how strong it is."

In other Nymex trading, gasoline futures rose 1 cent to $1.08 a gallon. Heating oil gained 2 cents to $1.17 a gallon, while natural gas for March delivery jumped 4 cents to $4.25 per 1,000 cubic feet.

In London, the March Brent contract rose $1.25 cents to $40.80 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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