Crude Oil Falls a Second Day as Slowing Economy Damps Demand

By Nesa Subrahmaniyan

Aug. 1 (Bloomberg) -- Crude oil fell for a second day, extending the biggest monthly decline since 2004, on concern global consumption is falling amid slowing economic growth.

The U.S. economy, the world's largest energy user, shrank at the end of 2007 and grew less than forecast in this year's second quarter. Manufacturing in China, the world's second- biggest energy consumer, contracted for the first time since a survey of purchasing managers began in 2005.

``I don't think we have seen the bottom of oil prices yet,'' said Tetsu Emori, a fund manager at Astmax Co. in Tokyo. ``Oil refiners don't want crude oil because demand for fuels is down.''

Crude oil for September delivery declined as much as 86 cents, or 0.7 percent, to $123.22 a barrel on the New York Mercantile Exchange. The contract traded at $123.29 a barrel at 1:36 p.m. Singapore time.

Futures dropped 11 percent in July, the biggest one-month drop since December 2004. Yesterday, the September contract fell $2.69, or 2.1 percent, to settle at $124.08 a barrel.

Oil prices have slipped more than $23 a barrel, or 16 percent, from the $147.27 record on July 11 on signs of declining demand in the U.S., which consumed about 24 percent of the world's crude in 2007.

U.S. airlines have announced plans to cut 26,000 jobs and park more than 460 jets to stem losses from a 62 percent jump in jet-fuel prices in the past year. U.S. fuel demand averaged 20.2 million barrels a day during the past four weeks, down 2.4 percent from a year earlier, the Energy Department said July 30.

`Business is Bad'

``Business is bad for airlines,'' Astmax's Emori said. ``Jet fuel inventories in the U.S. have been going up the past few weeks.''

Jet fuel stockpiles rose 1.8 million barrels, or 4.4 percent, to 41.7 million barrels in the week ended July 25, according to U.S. Energy Department data. Inventories in the U.S. have risen for three straight weeks as airlines cut routes after prices increased.

Tiger Airways Pte, the budget carrier partly owned by Singapore Airlines Ltd., said it will suspend services to the Australian city of Darwin because of high oil prices.

Brent crude oil for September settlement fell as much as $1, or 0.8 percent, to $122.98 a barrel, and traded at $123.14 a barrel at 1:42 p.m. Singapore time on London's ICE Futures Europe exchange. Yesterday, the contract declined $3.12, or 2.5 percent, yesterday to close at $123.98 a barrel

Biggest Economy

The U.S. economy grew at a 1.9 percent annualized rate after expanding 0.9 percent in the first quarter, the Commerce Department said in Washington.

The report also showed a recession may have begun in the final three months of 2007, as gross domestic product was revised to show a contraction in the period.

China's Purchasing Managers' Index fell to a seasonally adjusted 48.4 in July from 52 in June, the China Federation of Logistics and Purchasing said today in an e-mailed statement.

``The sharp drop confirms our view that economic activities are slowing sharply in China,'' Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong, said in an e-mail. The decline ``reflects the fact that China's manufacturing sector is facing tough challenges'' because of a slowdown in the global economy.

Crude prices may fall next week on falling demand. Thirteen of 29 analysts surveyed by Bloomberg News, or 45 percent, said prices will drop through August 8. Seven of the respondents, or 24 percent, said oil will rise and nine forecast little change. Last week 46 percent expected a decline.

Refiners Hurt

U.S. refinery utilization rates reached 87.2 percent, compared with 87.1 percent a week earlier and 89.5 percent in the week ended July 11, the U.S. Energy Department said on July 30 in its weekly inventory report.

``U.S. economic indicators are weighing heavily on sentiment,'' said Victor Shum, senior principal at Purvin & Gertz Inc. in Singapore. ``Negative refining margins are discouraging refiners from making gasoline.''

Exxon Mobil Corp., the world's biggest oil company, said yesterday profit from its refining business in the second quarter fell 54 percent to $1.56 billion. Profit at Royal Dutch Shell Plc's refining business slid 63 percent in the second quarter on higher costs, the Hague-based company said in its earnings report yesterday.

Refining margins have fallen below last year's levels because higher energy costs are hurting demand for fuels, Shell and BP Plc said this week. Crude prices in Europe and elsewhere outpaced gains in refined product prices during the second quarter, reducing earnings from processing fuels.

``In Europe and the U.S. we see that consumers started to react to the high prices,'' Shell Chief Executive Officer Jeroen van der Veer said yesterday.

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net.