Crude Oil Falls as Waning Demand Outweighs Prospect of OPEC Cut

By Nesa Subrahmaniyan

Oct. 22 (Bloomberg) -- Crude oil fell for a second day in New York as weakening fuel demand outweighed prospects of a production cut by OPEC at an emergency meeting in two days.

Oil prices dropped as stocks declined and the U.S. dollar climbed to 20-month high against the euro, reducing the appeal of commodities as an inflation hedge. OPEC, supplier of more than 40 percent of the world's oil, is poised to announce an output cut at an emergency meeting this week.

``It's about the real economy and that's going to drag demand down,'' said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. ``The market may have priced in an OPEC cut already so they may have to do a little more than what the market expects.''

Crude oil for December delivery fell as much as $1.36, or 1.9 percent, to $70.82 a barrel in electronic trading on the New York Mercantile Exchange, and traded at $71.20 a barrel at 10:19 a.m. Singapore time.

The November contract expired yesterday, after declining $3.36 to settle at $70.89 a barrel. Prices, which have tumbled 52 percent from the record $147.27 on July 11, are down 19 percent from a year ago.

Investors looking for protection against the dollar's decline earlier this year helped lead crude oil, gold, corn and gasoline to records.

Gold, copper and soybeans also fell yesterday. Investors often sell crude and other dollar-priced commodities when the U.S. currency gains, undermining their use as an inflation hedge. The dollar was at $1.3014 per euro at 9:45 a.m. in Singapore after rising 2.1 percent yesterday and reaching $1.3051, the strongest level since February 2007.

`Chronic Mismatch'

U.S. gasoline demand dropped 6.4 percent last week from a year ago, the 26th consecutive weekly decline, a MasterCard Inc. report yesterday showed.

``There's a chronic mismatch between demand and supply,'' said Michael Ivanovitch, president of MSI Global Inc. ``There's very little growth in the U.S. and Europe.''

The Organization of Petroleum Exporting Countries may disregard pleas from consuming nations on the brink of recession by cutting output by at least 1 million barrels this week, a Bloomberg News survey showed.

Thirty of 33 analysts surveyed yesterday and today forecast that OPEC will decide to cut output by 1 million barrels a day or more at the meeting in Vienna which was brought forward from November. That's more oil than Australia consumes. OPEC also may signal plans for an additional reduction of at least 500,000 barrels by early 2009.

Trim Supplies

Iran, OPEC's second-largest producer, said it favors a cut of between 2 million and 2.5 million barrels a day. Ministers from Algeria, Libya, and Qatar have said OPEC, which provides 40 percent of the world's oil, will need to trim supplies.

Saudi Arabia, which dominates OPEC proceedings as the group's largest producer, has yet to comment on its intentions.

OPEC will need ``more than one attempt'' to stabilize prices and may take ``several months before the desired result is achieved,'' Macquarie Group Ltd. energy research analyst David Johnson said in a report yesterday.

OPEC forecasts an excess of supply at the end of the year and start of 2009, the group's Secretary General Abdulla el- Badri told reporters yesterday in Moscow. El-Badri said that OPEC will try to balance the market, though it may not be able to achieve this goal on its own.

The U.S. Energy Department will probably report today that oil and gasoline supplies rose last week, a Bloomberg News survey showed. Crude-oil inventories climbed 2.65 million barrels in the week ended Oct. 17, according to the survey. It would be the fourth-straight weekly gain.

``The most critical data point to watch is U.S. implied petroleum demand. This has weakened substantially over the last months,'' Credit Suisse Group said in a research note today. An increase in inventories would be negative and ``risks are skewed to the downside in our view at least until the OPEC meeting.''

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