Oil Trades Near 14-Week Low as Economic Slowdown May Cut Demand

By Mark Shenk

Aug. 12 (Bloomberg) -- Crude oil was little changed after falling to a 14-week low yesterday on signs that the U.S. economic slump will extend into 2009, paring fuel demand.

Oil prices retreated as a Bloomberg News survey showed that the U.S. will grow at an average 0.7 percent annual pace from July through December, half the gain in the first half of the year. Prices rose in early trading as five days of clashes between Russia and Georgia threaten alternative export routes from Azerbaijan, needed because of a pipeline fire.

``It's become clear that demand is cratering, which is making it hard to rally,'' said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``It's hard to imagine that the market will shrug off the potential loss of 1 million barrels a day of pretty good quality crude, but that appears to be the case.''

Crude oil for September delivery rose 19 cents to $114.64 a barrel at 8:40 a.m. Sydney time on the New York Mercantile Exchange. Prices are up 60 percent from a year ago. Yesterday, futures fell 75 cents, or 0.7 percent, to settle at $114.45 a barrel, the lowest close since May 1.

Gasoline for September delivery rose 0.99 cent, or 0.4 percent, to $2.8765 a gallon in New York. Yesterday it fell 2.08 cents, or 0.7 percent, to settle $2.8666 a gallon, the lowest since April 14. Gasoline reached a record $3.631 a gallon on July 11.

Pump prices are following futures lower. Regular gasoline, averaged nationwide, fell 0.8 cents to $3.81 a gallon, AAA, the nation's largest motorist organization, said on its Web site. Pump prices reached a record $4.114 a gallon on July 17.

`Significant Change'

``I think we are looking at a significant change in market sentiment,'' David Kirsch, an energy markets analyst at PFC Energy in Washington, said in an interview with Bloomberg Radio. ``We are really only focusing on the bearish aspects of a dramatic slowdown in demand and increased supplies.''

Prices also fell because the dollar climbed to the strongest against euro in more than five months, reducing the need for commodities as a hedge against inflation. The dollar gained on speculation the economic slowdown that started in the U.S. is spreading.

The dollar increased versus the euro for a fifth day, advancing 0.5 percent to $1.4928 at 2:59 p.m. in New York, from $1.5005 on Aug. 8. It touched $1.4881, the strongest level since Feb. 26.

The Standard & Poor's GSCI Index of commodities fell as much as 1.2 percent to 695.444 and lost 22 percent from a record 893.859 on July 3, descending into bear territory.

Chinese Imports

China's July crude-oil imports fell 7 percent to about 3.25 million barrels a day, the lowest since December, the Beijing- based Customs General Administration of China said in a posting on its Web site yesterday. China is the world's second-biggest oil consumer. The U.S. is the biggest.

``The primary driving factor of the market is the sluggish economy,'' said Gene McGillian, an analyst at TFS Energy LLC in Stamford, Connecticut. ``We are looking for any evidence that the economic contagion in the U.S. and Western Europe is spreading to the Far East, where demand has been strong. The Chinese demand numbers may be a sign that demand is starting to flag in Asia.''

The fire on the Turkish stretch of the Baku-Tbilisi-Ceyhan pipeline was extinguished yesterday following an explosion last week. Georgia is a key link in a U.S.-backed southern energy corridor that connects the Caspian Sea region with world markets, bypassing Russia. The Baku-Tbilisi-Ceyhan pipeline ships Azeri Light crude.

`Double Digits'

``The threat to Caspian oil supplies appears to have been written off,'' McGillian said. ``There will have to be a more frightening development in the Caucasus or some other trouble spot to make this market rally.''

Oil tankers collecting cargoes from the Georgian port of Batumi moved farther out into the Black Sea after the town was bombed last night, a local shipping agent said.

Tankers moved as much as 15 miles (24 kilometers) out to sea, Batumi-based Garsevan Jorbenadze, a ship agent at TeRo Co. Ltd. who arranges for ships to dock and load, said by phone yesterday. The nearby oil terminal of Supsa, also on the Black Sea, appears to be operational, with one ship waiting to enter the port, he said.

``The explosion on the BP pipeline in Turkey is the more critical as far as supply is concerned,'' said Tim Evans, an energy analyst with Citi Futures Perspective in New York. ``Once the pipeline is back up and running, the situation at Georgia's Black Sea ports will become less of an issue.''

Brent crude oil for September settlement fell 66 cents, or 0.6 percent, to settle at $112.67 a barrel on London's ICE Futures Europe exchange yesterday, the lowest since May 1.

``I think it would be very easy for prices to dip down to double digits before the end of the year,'' Kirsch said.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.