Crude Oil Trades Near $38 on Concern Global Demand Is Slowing

By Christian Schmollinger and Gavin Evans

Feb. 16 (Bloomberg) -- Crude oil traded little changed near $38 a barrel in New York on speculation the recession in the world’s largest economies will slash demand for fuel and energy.

Japan’s economy, the world’s largest oil consumer after the U.S. and China, contracted the most since 1974 in the fourth quarter, a government report showed today. OPEC will likely cut production again next month if prices remain below $40, Iran’s representative, Mohammad Ali Khatibi, said yesterday.

Gross domestic product “is sliding, jobs are being lost, manufacturing going down and this just reinforces the feeling that demand will be bad,” said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. “We can’t expect a recovery in demand anytime soon.”

Crude oil for March delivery was at $37.50 a barrel, down 1 cent, in after-hours electronic trading on the New York Mercantile Exchange at 12:15 p.m. in Singapore. It earlier rose as much as 43 cents to $37.94 a barrel.

The contract jumped 10 percent to $37.51 a barrel on Feb. 13, its first gain in six days and the largest daily increase since Jan. 21, as traders who had been betting on further declines bought oil to limit losses during the three-day Presidents’ Day holiday weekend in the U.S. Pit trading on Nymex will be closed today.

The March contract expires on Feb. 20. The April contract dropped 23 cents, or 0.6 percent, to $41.74 a barrel in the sixth straight decline.

Economic Downturn

Japan’s gross domestic product contracted at an annual 12.7 percent pace in the fourth quarter 2008, the Cabinet Office said today in Tokyo. That followed a 13.9 percent drop in exports from the third quarter.

Global economic data “are firmly pointing in the same direction,” said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. “With demand where it is, the market may well still be over-supplied.”

The Group of Seven nations said the “severe” downturn will persist through 2009 and International Monetary Fund Managing Director Dominique Strauss-Kahn predicted a “second wave” of nations will ask for emergency cash as state finances crumble.

Toyota Motor Corp., the world’s biggest carmaker, will slash domestic production 54 percent in the current quarter as demand plunges in the U.S. and Japan.

Contango Structure

Brent crude oil for April settlement was at $44.69 a barrel, down 12 cents, on London’s ICE Futures Europe exchange at 12:12 p.m. Singapore time. It fell 30 cents, or 0.7 percent, to $44.51 on Feb. 13.

New York oil futures have fallen 75 percent from a record $147.27 reached in July and declined 10 percent this month. Stockpiles in the U.S., the world’s biggest oil consumer, have risen for the past seven weeks and are at their highest since July 2007, according to Energy Department records.

The price of oil for delivery in April is $4.19 a barrel higher than for March. December futures are up $15.02 from the front month, versus $19.89 yesterday. This structure, in which the future month’s price is higher than the one before it, is known as contango, allowing buyers to profit from hoarding oil.

The build in supplies at Cushing, Oklahoma, where West Texas Intermediate, the U.S. benchmark grade, is stored, has contributed to the contango. Inventories there climbed 1.7 percent to 34.9 million barrels last week, the Energy Department said on Feb. 11. It was the highest since at least April 2004, when the department began keeping records for the location.

Reduced Net-Longs

Hedge-fund managers and other large speculators decreased their net-long position in New York crude-oil futures in the week ended Feb. 10, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 16,578 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions fell by 12,698 contracts, or 43 percent, from a week earlier.

The Organization of Petroleum Exporting Countries, which pumps 40 percent of the world’s oil, last week cut its 2009 oil demand forecast for a sixth straight month, citing a “sudden and massive” drop in consumption.

It fixed a daily production ceiling of 24.845 million barrels from Jan. 1 for its 11 members with quotas, taking its cuts since September to 4.2 million barrels a day.

Venezuela will support oil quota cuts if they are necessary, Energy and Oil Minister Rafael Ramirez said in Caracas yesterday.

The long delay between the imposition of the cuts and their impact in markets makes it hard to gauge whether enough oil has been taken out of the market, National Australia’s Burg said.

Prices seem “pretty comfortable in a high-$30s, low $40s kind of range,” which may reflect the increase in oil production costs in recent years, he said.

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