Oil Rises in Light Trading After Dropping on Demand Concern

By Mark Shenk

Dec. 24 (Bloomberg) -- Crude oil rose in light holiday trading after dropping yesterday on signs that the economy of the U.S., the world’s biggest oil consumer, may contract further.

Crude declined as much as 5.3 percent yesterday, extending its slide from a record $147.27 a barrel in July. The median resale price of homes fell 13 percent, probably the largest drop since the Great Depression, National Association of Realtors Chief Economist Lawrence Yun said in Washington.

“The primary factor that’s been guiding the market is concern about demand,” said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut. “We are searching for where the bottom to this record slide is.”

Oil for February delivery rose 24 cents, or 0.6 percent, to $39.22 a barrel at 10:16 a.m. Sydney time on the New York Mercantile Exchange. Prices are down 59 percent this year. Yesterday, oil fell 93 cents, or 2.3 percent, to close at $38.98 a barrel.

Oil for delivery in February 2010 was more than $14 higher than the current month yesterday, a market condition known as contango. The pattern encourages companies to increase supplies.

U.S. crude-oil stockpiles probably increased 500,000 barrels in the week ended Dec. 19 from 321.3 million the week before, according to the median of responses in a Bloomberg News survey before an Energy Department report today. It would be the 12th gain in 13 weeks, also an indication that demand is falling.

‘Strong Contango’

“The strong contango is providing a strong incentive for people to put oil in storage and discourages financial investors that had such a big role in the run-up in prices,” said Guy Caruso, senior adviser with the Energy and National Security programs at the Center for Strategic and International Studies in Washington.

The Energy Department is scheduled to release its next inventory report at 10:35 a.m. today in Washington.

“We are seeing the reverse of what happened in the first half of 2008, when prices surged,” said Caruso, who was administrator of the Energy Information Administration, the statistical arm of the Energy Department, from 2002 until September.

Sales of new homes in the U.S. fell 2.9 percent last month to a 17-year low of 407,000, the Commerce Department said yesterday in Washington. The median sales price declined 11.5 percent from a year earlier to $220,400.

“I doubt there will be much strength in the energy markets as long as people are worried about losing their jobs and paying their bills,” McGillian said.

Shrinking Economy

The U.S. economy shrank in the third quarter at a 0.5 percent annual rate, the worst since 2001, according to revised figures from the Commerce Department.

The Gross Domestic Product numbers “are in line with expectations,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “Now the question is how long it will be before the economy recovers or at least stops its decline.”

Prices may be more volatile this week because many traders are taking time off for the Christmas holidays.

“Volume is declining by the day,” Barakat said.

Volume in electronic trading on the exchange was 232,352 contracts, as of 3:13 p.m. in New York yesterday. Volume totaled 287,570 contracts Dec. 22, down 42 percent from the average over the past 3 months. Open interest Dec. 22 was 1.14 million contracts. The exchange has a one-day delay in reporting open interest and full volume data.

OPEC Response

The Organization of Petroleum Exporting Countries announced a record production cut last week in response to collapsing demand as a result of the economic slowdown. The group may hold an emergency meeting before its next scheduled gathering in March, Venezuelan Energy Minister Rafael Ramirez said yesterday.

Ramirez, who was attending a summit of gas-producing nations in Moscow, didn’t say exactly where or when such an oil meeting might take place.

OPEC President Chakib Khelil said four days ago that OPEC may meet in Kuwait City on Jan. 19 to discuss further production cuts, adding that OPEC will continue to reduce supply as demand falls until an “equilibrium” is reached.

Brent crude oil for February settlement declined $1.09, or 2.6 percent, to $40.36 a barrel on London’s ICE Futures Europe exchange.

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