Oil Set for Weekly Drop as Recession Concerns Trump OPEC Cuts

By Christian Schmollinger

Jan. 30 (Bloomberg) -- Crude oil in New York was little changed, set for a weekly decline of 11 percent, as concerns about a deeper global recession outweighed OPEC pledges to increase output cuts.

Japan headed for its worst postwar recession as factory output slumped a record 9.6 percent, orders for U.S. durable goods fell for a fifth consecutive month in December and the number of Americans receiving unemployment benefits soared to a record. OPEC won’t hesitate to cut output further if prices keep falling, Secretary General Abdalla el-Badri said at the World Economic Forum yesterday.

“It would be brave to say the U.S. and global economy has reached a bottom and most forecasters are looking for more oil demand destruction in 2009,” said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. “A supportive factor for prices is a belief in the market that the OPEC producers are aggressively cutting to reduce supplies.”

Crude oil for March delivery was at $41.64 a barrel, up 20 cents, at 8:24 a.m. London time on the New York Mercantile Exchange.

Yesterday, March futures fell 72 cents, or 1.7 percent, to settle at $41.44 a barrel in New York. Prices are down 6.5 percent in January, the seventh straight monthly decline, and are 55 percent lower than a year earlier.

“What you find with oil prices that they are a real proxy for global growth and global growth is going to be awful this year, so oil prices will reflect that,” Mark Pervan, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne, said in a Bloomberg Television interview. “We see oil prices sliding back to $30 over the next quarter.”

Japan’s Jobless

The drop in Japanese industrial production in December eclipsed the previous record of 8.5 percent set only a month earlier, the Trade Ministry said today. The jobless rate soared to 4.4 percent from 3.9 percent, the biggest jump in 41 years.

Current oil prices below $50 a barrel are “too low” because they don’t allow producers to invest in expanding capacity, OPEC’s El-Badri said at the meeting in Davos, Switzerland.

The Organization of Petroleum Exporting Countries set a production ceiling of 24.845 million barrels a day as of Jan. 1 for its 11 members with quotas, 4.2 million barrels a day lower than its output in September. Iraq is the only member not subject to the group’s quotas.

Bolstering prices in the past day are signs the United Steelworkers union will reject the third contract offer from Royal Dutch Shell Plc covering workers at U.S. refineries with almost two-thirds of the country’s capacity. The current agreement expires Feb. 1.

Strike Threat

Failure to reach a new accord “poses a real threat of strike action,” Gary Beevers, the Steelworkers’ international vice president in charge of the talks, said in a written message to union members yesterday. The offer will be “rejected at the appropriate time,” Beevers said.

BP Plc, Europe’s second-largest oil company, said it may shut four U.S. refineries with union workers that can process 1.3 million barrels a day of crude oil if the steelworkers’ union goes on strike. Exxon Mobil Corp. and Shell are preparing to keep their U.S. plants running if there is a work stoppage.

Gasoline futures for February delivery were at $1.2380 a gallon, up 0.71 cent, after rising 4.74 cents, or 4 percent, yesterday. Heating oil for February increased yesterday 0.68 cent, or 0.5 percent, to settle at $1.4283 a gallon.

U.S. crude oil inventories climbed 1.9 percent to 338.8 million barrels last week, the highest since August 2007, an Energy Department report showed Jan. 28.

Cushing Stockpiles

Crude oil supplies at Cushing, Oklahoma, where oil that’s traded on Nymex is stored, climbed 0.9 percent to 33.5 million barrels last week, the highest since at least April 2004, when the department began keeping records, according to the report.

The price of oil for delivery next December is 34 percent more than for the current month, increasing the opportunity for traders to profit from storing crude for later use. This structure, in which a future month’s price is higher than the one before it, is known as contango.

Brent crude oil for March settlement was at $45.50 a barrel, up 10 cents, on London’s ICE Futures Europe exchange at 3:55 p.m. Singapore time. It yesterday rose 50 cents, or 1.1 percent, to end the session at $45.40 a barrel.

To contact the reporter on this story: Christian Schmollinger in Singapore at o christian.s@bloomberg.net.