Crude Oil Falls Below $34 a Barrel as Global Recession Deepens

By Christian Schmollinger and Gavin Evans

Jan. 20 (Bloomberg) -- Crude oil fell below $34 a barrel in New York on concern the global recession has deepened after the U.K. bailed out banks for the second time in three months.

Slowing world demand, reduced tensions in the Middle East and settlement of Russia's gas dispute with Ukraine could push prices toward last month's four-year low of $32.40, Goldman Sachs Group Inc. said yesterday. The British Treasury authorized the central bank yesterday to buy toxic assets and increase its stake in Royal Bank of Scotland Group Plc.

``For the next six months we'll see awful economic data coming out, banks possibly having to be nationalized and excess inventories in the U.S.,'' said Jonathan Kornafel, a director for Asia at options traders Hudson Capital Energy in Singapore. ``There is really nothing that can pull this market higher.''

Crude oil for February delivery traded at $33.60 a barrel, down 8 percent from last week's close, in after-hours trading on the New York Mercantile Exchange at 3:28 p.m. Singapore time. The price fell as low as $33.55 a barrel earlier today.

The contract expires today. Floor trading was closed for the Martin Luther King Jr. holiday yesterday. Trades then will be booked today for settlement.

``We're pretty close to the bottom if we're not there already,'' Michael Lynch, president of Strategic Energy & Economic Research Inc. in Winchester, Massachusetts, said in a Bloomberg Television interview. ``I don't think the market can sustain a price much below this.''

The more-actively traded March contract was at $40.09, down 5.8 percent, after falling as low as $40.02 today.

Brent crude oil for March settlement fell as much as 70 cents, 1.6 percent, to $43.80 a barrel on London's ICE Futures Europe exchange. The contract fell $2.07, or 4.4 percent, to $44.50 a barrel yesterday.

Rising Stockpiles

Rising U.S. stockpiles and forecasts from the International Energy Agency and OPEC on declining world demand contributed to an 11 percent decline in Nymex crude last week. Prices are down 20 percent this year, after tumbling 54 percent in 2008.

Crude-oil inventories at Cushing, Oklahoma, where West Texas Intermediate traded on the Nymex is stored, climbed 2.5 percent to 33 million barrels last week, the Energy Department said this week. It was the highest since at least April 2004, when the department began keeping records for the location.

U.S. crude stockpiles increased 1.14 million barrels to 326.6 million barrels last week, the highest since Aug. 31, 2007, the Energy Department said on Jan. 14. Gasoline and distillate fuel supplies also rose.

Oil may make a ``swift and violent rebound'' to $65 a barrel in the second half as OPEC production cuts take effect and other producers also trim output, Goldman Sachs analyst Jeffrey Currie said at a conference in London yesterday.

Russia, Ukraine

Russia and Ukraine signed 10-year natural-gas contracts, ending a dispute that's squeezed supplies to the European Union for almost two weeks and setting the stage for a resumption of deliveries.

Russian Prime Minister Vladimir Putin said yesterday gas flows to the 27-nation bloc will restart in ``full volumes'' through all export routes. His Ukrainian counterpart, Yulia Timoshenko, said there would be ``no delays.''

The Organization of Petroleum Exporting Countries may have to cut output again should prices fall further, Algerian Oil Minister Chakib Khelil said Jan. 17.

Crude oil has lost about three-quarters of its value since rising to a record $147.27 a barrel in July, as the worst global recession since World War II erodes demand. At OPEC's last meeting in December, members agreed to a record 9 percent reduction in supply targets effective Jan. 1.

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