Crude Oil Falls Below $40 as Demand Drops Faster Than Supply

By Grant Smith and Angela Macdonald-Smith

Jan. 12 (Bloomberg) -- Crude oil fell below $40 in New York on concern production cuts by the Organization of Petroleum Exporting Countries will fail to counter a slump in demand.

Oil consumption will fall by 1 million barrels a day this year as the U.S., Europe and Japan face their first simultaneous recessions since the Second World War, Deutsche Bank AG predicted last week. U.S. stockpiles have climbed in 13 of the past 15 weeks, according to the Energy Department. OPEC members signaled last week they will curb sales to refiners in February.

“The health of the global economy is the dominant consideration in the short term, and that is weighing down on prices,” said Harry Tchilinguirian, senior market analyst at BNP Paribas SA in London. “OPEC cuts may prove to be supportive in future but it’ll take time for them to take effect.”

Crude oil for February delivery fell as much as $2.40, or 5.9 percent, to $38.43 a barrel in electronic trading on the New York Mercantile Exchange. It was at $38.52 a barrel at 11:28 a.m. in London.

China, the fastest-growing oil consumer, may miss the government’s 8 percent economic growth target, two top officials said today. Oil prices fell 12 percent last week as economic data showed the economic slump worsening. On Jan. 9, the U.S. said it lost 2.589 million jobs last year, the most since 1945.

OPEC, supplier of more than 40 percent of the world’s oil, agreed last month to slash production quotas by 9 percent to revive prices as the global recession erodes demand. Oil has plunged more than $100 in the last six months.

Saudi Notices

Saudi Aramco, the world’s biggest state oil company, sent notices to refiners in Asia on Jan. 9 that it would lower crude supplies to Asia by around 10 percent in February. This was the third month the company had reduced sales.

“Although OPEC have made substantial production cuts there is an overhang of prompt oil and until that is absorbed the market may not rally substantially,” Christopher Bellew, senior broker at Bache Commodities Ltd. in London.

OPEC may trim production further should crude prices continue to decline, Iran’s OPEC Governor Mohammad Ali Khatabi said Jan. 11. OPEC is scheduled to meet next in Vienna on March 15. Iran is the group’s second-largest producer, after Saudi Arabia.

Oil for March delivery is at a more than $5 a barrel premium to the front-month contract, while the April future is $9 above February-delivered supplies. The situation where near- term crude is cheaper than later-dated oil is called contango.

“The curve is very steep, which is consistent with the view that the market tightens up in time and we get higher prices down the track,” said David Moore, a commodity strategist at Commonwealth Bank of Australia. “It will take a while for those production cuts to eat away at inventories.”

Cushing Stockpiles

Oil for February dropped last week as stockpiles at Cushing, Oklahoma, the delivery point for crude traded at Nymex, climbed to 32.2 million barrels, the highest since the U.S. Energy Department started tracking the supplies in 2004. Total capacity in the area is about 47.7 million barrels, according to estimates from Andy Lipow at Houston-based consultants Lipow Oil Associates LLC.

Brent crude for February settlement fell as much as $2.02, or 4.6 percent, to $42.40 a barrel on London’s ICE Futures Europe exchange. It was at $42.54 a barrel at 11:29 a.m. London time.

Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures in the week ended Jan. 6, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 76,658 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions rose by 12,110 contracts, or 19 percent, from a week earlier.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net.