Crude Oil Falls to 10-Month Low on Demand Slump, Credit Turmoil

By Nesa Subrahmaniyan and Grant Smith

Oct. 8 (Bloomberg) -- Crude oil fell to a 10-month low as the worsening financial crisis looked set to constrain consumption in the U.S. and other developed nations.

Oil dropped to its lowest since Dec. 6 as global stock markets tumbled on concern the credit crisis will topple more banks and slowing growth will cut demand. U.S. gasoline demand dropped 9.5 percent last week, according to MasterCard Inc., and falling consumption prompted the Energy Department to cut its oil price forecasts yesterday.

``Demand destruction is prevalent in developed countries with consumption falling at about 3 to 4 percent,'' said Tobias Merath, a commodity analyst at Credit Suisse Group in Singapore. ``The credit crunch is forcing traders to de-leverage their positions as they have no access to credit.''

Crude oil for November delivery fell as much as $4.01, or 4.5 percent, to $86.05 a barrel in electronic trading on the New York Mercantile Exchange, and traded at $86.51 a barrel at 9:24 a.m. in London.

Futures have declined 40 percent from the record $147.27 reached July 11. Yesterday, crude oil rose $2.25 to $90.06 a barrel in New York.

European and Asian stocks plunged, driving the Nikkei 225 Stock Average to its biggest drop since October 1987. The MSCI World Index lost 2.8 percent to 1,010.85 at 8:50 a.m. in London.

The Standard & Poor's 500 Index slid 60.66 points, or 5.7 percent yesterday, to 996.23, extending its 2008 tumble to 32 percent in the market's worst yearly slump since 1937.

Demand Slump

Credit ``conditions are unlikely to improve significantly in the next few weeks or months, commodities prices may very well remain under pressure in the near future,'' Goldman Sachs Group Inc. commodity research analysts including Giovanni Serio and Jeffrey Currie said in a report yesterday.

U.S. motorists bought an average 8.625 million barrels of gasoline a day in the week ended Oct. 3, down from 9.536 million a year earlier, MasterCard, the second-biggest credit-card company, said yesterday in its SpendingPulse report. It was the 24th consecutive weekly decline, and the biggest since September 2005, after Hurricane Katrina sent pump prices to records.

The drop comes as tightening credit markets, bank failures and rising unemployment claims may indicate that the U.S. is entering a recession, curtailing fuel consumption.

West Texas Intermediate crude oil, the U.S. benchmark, will average $112 a barrel in 2008, the Energy Department said in its monthly Short-Term Energy Outlook. The forecast is down 3.3 percent from $115.81 a barrel estimated last month, the report from the department's Energy Information Administration showed.

OECD Demand

U.S. oil demand will average 19.8 million barrels a day this year, down 830,000 barrels a day from 2007. This year's demand forecast was reduced 270,000 barrels from last month.

Demand among the 30-member Organization for Economic Cooperation and Development will fall 1.07 million barrels to 48.07 million barrels a day, the Energy Department said.

The OECD doesn't include developing countries such as Brazil, China and India. Consumption by non-OECD countries will rise 1.4 million barrels a day to 38.07 million barrels.

``Problems in the credit market are impeding the ability to build or hold inventory, placing excessive downward pressure on near-term prices,'' the Goldman analysts said.

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