Crude Oil Falls, Snapping Three-Day Rally, as Recession Deepens

By Alexander Kwiatkowski

Feb. 27 (Bloomberg) -- Crude oil fell in New York, snapping a three-day rally, on signs the global recession is deepening after the U.S. economy contracted faster than anticipated.

Oil dropped as U.S. data showed the world’s biggest economy shrank at an annual pace of 6.2 percent in the fourth quarter, the most since 1982. Crude also fell as the dollar strengthened, reducing the appeal of commodities priced in the U.S. currency.

“We still have an oversupply in the market and we have low demand,” said Sintje Diek, an HSH Nordbank analyst in Hamburg. “For the coming months, the situation will not really change.”

Crude oil for April delivery fell as much as $2.62, or 5.8 percent, to $42.60 a barrel on the New York Mercantile Exchange. It was at $42.93 a barrel at 1:43 p.m. London time.

Futures rose $2.72, or 6.4 percent, to $45.22 a barrel yesterday, the highest settlement since Jan. 26. Crude oil is poised for a 7.1 percent gain this month.

Brent crude oil for April settlement declined as much as $1.93, or 4.2 percent, to $44.58 a barrel on London’s ICE Futures Europe exchange. It was at $44.88 at 1:43 p.m. London time.

U.S. GDP was projected to contract at a 5.4 percent annual pace last quarter, according to the median estimate of 74 economists surveyed by Bloomberg News. Forecasts ranged from declines of 3.8 percent to 6 percent.

Japan’s month-on-month decline in factory output exceeded the December record drop of 9.8 percent, the Trade Ministry said today in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years.

Stronger Dollar

The dollar strengthened to $1.2663 per euro as of 12:58 p.m. in London, from $1.2744 yesterday. The dollar index, a measure of its value versus a basket of leading currencies, strengthened to the highest since April 2006. A stronger dollar reduces the appeal of commodities as a hedge for investors against inflation.

Companies are slashing jobs at a faster pace in the U.S., a report yesterday showed. The Labor Department said 667,000 Americans filed initial applications for jobless benefits last week, up from 631,000 the prior week.

Oil gained earlier this week after a U.S. government report showed a drop in gasoline stockpiles and OPEC members called for further cuts in output.

The rally in prices was “really a correction at a very low level,” said HSH Nordbank’s Diek. “The market realized that OPEC is implementing its production cuts and maybe we will see another cut in March.”

The Organization of Petroleum Exporting Countries will reduce crude-oil shipments by 1.7 percent in the month ending March 14, according to Oil Movements. Members will load 22.8 million barrels a day in the period, down from 23.2 million a day in the month ended Feb. 14, the Halifax, England-based tanker tracker said.

U.A.E. Cuts

Abu Dhabi National Oil Co. will cut exports of crude oil in April. The United Arab Emirates state-owned producer will ship 17 percent less Upper Zakum crude oil than contracted, following a 15 percent reduction for March, the company said yesterday. Deliveries of Umm Shaif, Lower Zakum and Murban crude will be cut by 15 percent.

Oil prices are likely to recover as the cuts made by the producer group outweigh declining demand, Commerzbank AG analyst Eugen Weinberg said in a report today.

“With OPEC crude oil supply falling by more than oil demand, we expect global inventories to decline and prices to recover,” he said.

Fifteen of 31 analysts surveyed by Bloomberg News, or 48 percent, said oil futures will increase through March 6. Ten respondents, or 32 percent, forecast oil prices will be little changed and six said that there will be a decline. Last week, 43 percent of analysts expected prices would fall.

To contact the reporters on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net