Oil Trades Near $40 a Barrel on Concern Recession Will Deepen

By Christian Schmollinger and Angela Macdonald-Smith

Feb. 23 (Bloomberg) -- Crude oil traded near $40 a barrel in New York as traders weighed the risk of a deepening global recession against government measures to revive economic growth.

The Organization of Petroleum Exporting Countries may make another production cut should oil prices continue to fall, Chakib Khelil, the Algerian oil minister and former OPEC president, said yesterday. The dollar fell on speculation the U.S. government will take larger stakes in the nation’s banks.

“Crude really has been seeking direction from other markets,” said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. “In the near term, the rather dismal macro-economic backdrop will put a lid on oil prices.”

Crude oil for April delivery was at $40.26 a barrel, up 23 cents, in after-hours electronic trading on the New York Mercantile Exchange at 12:05 p.m. Singapore time. It earlier fell as much as 50 cents, or 1.3 percent, to $39.53 a barrel.

The government may increase its stake and end up holding as much as 40 percent of Citigroup Inc.’s common stock, the Wall Street Journal reported.

Oil was supported as the dollar fell to a one-week low against the euro. The decline in the U.S. currency draws investors to commodities as an inflation hedge.

Asian Stocks

Asian stocks rose, with the MSCI Asia Pacific Index gaining 1.1 percent to 76.86 at 11:46 a.m. in Tokyo after falling 1.1 percent. The gauge lost 14 percent this year as the worsening economic slowdown hurt corporate profits.

On Feb. 20, the April crude oil contract declined 15 cents, or 0.4 percent, to $40.03. The March future expired that day at $38.94 a barrel. Oil lost as much as 6.6 percent on Feb. 20 as the Dow Jones Industrial Average fell below its lowest close since 1997.

“We are looking at oil consumption this year down by more than a million barrels a day,” said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. “That certainly is significant and puts pressure on OPEC to try and balance against it.”

Brent crude oil for April settlement was at $42.01 a barrel, up 12 cents, on London’s ICE Futures Europe exchange at 12 p.m. Singapore time. It earlier declined as much as 39 cents, or 0.9 percent, to $41.50 a barrel

Barclays Capital on Feb. 19 cut its forecast for the average 2009 Brent crude price to $60 a barrel from $71 because of the weakening global economic outlook. The bank expects world oil demand to drop 1.25 million barrels a day this year.

Royal Dutch Shell Plc’s Chief Executive Officer Jeroen van der Veer said the falling price of oil won’t hamper the company’s $31 billion investment program planned for this year.

“For our projects, we never took into account that oil prices would remain so high for so long,” Van der Veer said on Dutch public television. “So, all our investments - and the few we postponed - can perfectly withstand current oil prices.”

Longs Increase

Oil companies are reining in capital spending and putting projects on hold following the 54 percent drop in crude last year, the first annual decline since 2001. Shell delayed a decision on the second-phase expansion of its Athabasca oil- sands project in Canada in October and cut 2008 spending plans.

Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures in the week ended Feb. 17, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 45,016 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions rose by 28,438 contracts, or 172 percent, from a week earlier.

To contact the reporters on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net; Christian Schmollinger in Singapore at christian.s@bloomberg.net