Crude Oil Falls as Global Slowdown Cuts Demand in China, Japan

By Gavin Evans and Christian Schmollinger

Nov. 17 (Bloomberg) -- Oil fell for a second day in New York as Japan entered its first recession since 2001 and China's largest crude producer said demand has contracted ``sharply.''

Japan's economy contracted 0.4 percent in the September quarter, official figures today showed. China National Petroleum Corp., the biggest producer in the world's second-largest oil consumer, said demand has declined since September because of the global credit crisis. OPEC may wait until December to cut output, the group's president said.

``There doesn't seem to be much out there to stop the fall in prices,'' said Toby Hassall, research analyst at Commodity Warrants Pty in Sydney. ``Weak demand and a pretty bleak demand outlook'' may push oil prices as low as $50 this week, he said.

Crude oil for December delivery dropped as much as $1.44, or 2.5 percent, to $55.60 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $56.03 at 3:52 p.m. in Singapore.

The contract slumped 2.1 percent to settle at $57.04 on Nov. 14, having touched $54.67 the previous day, the lowest since Jan. 30, 2007. Prices declined 6.6 percent last week as world equity markets dropped, Germany entered its worst recession in 12 years and U.S. retail sales fell for a fourth straight month.

``The market is continuing to trade down in general,'' said Clarence Chu, a trader with options market-maker Hudson Capital Energy in Singapore. ``China is a significant market for oil. If China slows down, that will put a big dent in demand.''

Japan, the world's second-largest crude importer, had been expected by economists to avoid recession and record growth of 0.1 percent in the September quarter. Japan used 5.1 million barrels a day in 2007, according to the BP Statistical Review of Energy. China used 7.9 million barrels a day.

IEA Cuts Forecast

``As the impact of the financial crisis on China's economy deepens, the company's operations have also been affected adversely,'' China National Petroleum said in a statement on its Web site.

The International Energy Agency last week slashed its global oil consumption forecast for 2009 by 670,000 barrels a day. Demand will rise 0.4 percent to 86.5 million barrels a day, with growth in emerging nations partly offsetting a 1.6 percent contraction in fuel use in developed economies, the Paris-based agency said.

Brent crude oil for January settlement dropped as much as 99 cents, or 1.8 percent, to $53.25 a barrel on London's ICE Futures Europe exchange. It was at $53.51 a barrel at 3:53 p.m. Singapore time. The contract fell 3.6 percent to $54.24 a barrel on Nov. 14.

G-20 Meeting

Leaders from the biggest developed and emerging nations agreed to further steps to shore up a global economy sliding into recession, and laid out regulatory proposals to prevent a recurrence of the financial crisis.

The Group of 20 nations this weekend urged a ``broader policy response,'' citing the potential for additional interest- rate cuts and fiscal stimulus, after meeting in Washington. The group set a March deadline for recommendations on strengthening accounting standards, derivatives markets and oversight of hedge funds and debt-rating companies.

``This isn't a strong action statement on addressing the matters at hand,'' said Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York.

Hedge-fund managers and other large speculators increased their net-short position in New York crude-oil futures in the week ended Nov. 11, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 52,984 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-short positions rose by 42,441 contracts, or 403 percent, from a week earlier.

Production Cut

The Organization of Petroleum Exporting Countries is likely to wait until December before cutting output again, the group's president, Chakib Khelil, said in Algeria yesterday.

Saudi Arabia, the world's biggest oil producer and the largest member in OPEC, will help alleviate global financial stress by maintaining stable oil markets, King Abdullah said after the meeting of Group of 20 leaders in Washington Nov. 15.

Iran, OPEC's second-largest producer, may seek a production cut of as much as 1.5 million barrels a day when the group meets in Cairo later this month, the Associated Press reported Nov. 15, citing televised comments by the nation's OPEC Governor Mohammad Ali Khatibi.

``They will have to cut at least a million and a half barrels,'' said Hudson Capital Energy's Chu. ``Anything less and the market is likely to ignore it or even sell.''

The group, which pumps about 40 percent of the world's oil, cut output by 1.5 million barrels a day last month. It will have more information on which to make a decision on further cuts at the Dec. 17 meeting in Oran, Algeria, Khelil said yesterday.

``We have yet to see the full cut from the previous meeting implemented at this stage,'' Commodity Warrants' Hassall said. ``Compliance is always going to be an issue.''

To contact the reporters on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net; Christian Schmollinger in Singapore at christian.s@bloomberg.net.