Oil Falls for a Second Day as Recession May Reduce Fuel Demand

By Christian Schmollinger

March 2 (Bloomberg) -- Crude oil fell for a second day as a contraction in China’s manufacturing, a drop in South Korean exports and declining Japanese wages added to evidence that the global recession will reduce demand for fuel.

Oil also dropped before an Institute of Supply Management report today that may show U.S. manufacturing contracted in February from the previous month, according to a Bloomberg survey of economists. China’s manufacturing shrank for a seventh month and South Korean exports tumbled for a fourth month in February. In Japan, wage declines accelerated in January.

“This negative news on the economic data isn’t going away anytime soon,” said Jonathan Kornafel, a director for Asia at Hudson Capital Energy in Singapore. “If the U.S. isn’t buying oil, they aren’t buying other things and that affects the manufacturing numbers here in Asia, which will affect gasoline and fuel oil needs in the region.”

Crude oil for April delivery fell as much as $1.25, or 2.8 percent, to $43.51 a barrel in electronic trading on the New York Mercantile Exchange. It was at $43.60 a barrel at 2 p.m. Singapore time.

Futures have dropped 70 percent from the record $147.27 a barrel reached on July 11.

Brent crude oil for April settlement declined as much as $1.24, or 2.7 percent, to $45.11 a barrel on London’s ICE Futures Europe exchange. It was at $45.33 a barrel at 1:34 p.m. Singapore time.

Economic Weakness

“The bigger picture remains one of economic weakness in the U.S.,” said David Moore, a commodity strategist with Commonwealth Bank of Australia Ltd. in Sydney. The economic data “raises concerns about weakness in commodity consumption, including oil,” he said.

The Institute for Supply Management’s factory index fell to 34 in February from 35.6 the prior month, according to the median of analysts’ estimates. A reading of 50 is the dividing line between growth and contraction.

Copper also dropped on concern the global recession is deepening, cutting commodity demand. Copper for delivery in three months on the London Metal Exchange fell 2.6 percent to $3,360 a metric ton at 11:41 a.m. Singapore time.

Gold gained in Asia as investors deemed five straight days of losses excessive amid turmoil in the financial markets. Immediate-delivery gold climbed as much as $11.35, or 1.2 percent, to $953.70 an ounce, before trading at $950.95 at 11:40 a.m. in Singapore.

U.S. Jobless

U.S. employers may have cut payrolls by 650,000, the most since 1949, and the jobless rate probably surged to 7.9 percent, according to the median estimates in a Bloomberg News survey ahead of Labor Department figures March 6.

The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 45.1 from 42.2 in January, CLSA Asia-Pacific Markets said today in an e-mailed statement. A reading below 50 shows a contraction.

South Korea’s overseas shipments decreased 17.1 percent to $25.8 billion from a year earlier following January’s record 33.8 percent slump, the Ministry of Knowledge Economy said.

Japan’s monthly wages, including overtime and bonuses, fell 1.3 percent from a year earlier to 278,476 yen ($2,864), after declining 0.8 percent in December, the Labor Ministry said in Tokyo today. Overtime pay retreated at the fastest pace ever.

Officials from the Organization of Petroleum Exporting Countries, the supplier of 40 percent of the world’s oil, gave conflicting signals on their intentions to further cut output to bolster prices when they meet in Vienna on March 15.

Algeria, Iran

The group “will likely” reduce supplies to support prices when it gathers, Algerian Oil Minister Chakib Khelil said on Feb. 28 in Algiers.

Yesterday, Iran’s oil minister said OPEC is unlikely to lower crude production when it meets.

“I don’t believe we will go toward another production cut,” Gholamhossein Nozari said in comments posted on the Web site of state-run Iranian Students News Agency. “In this meeting we will need to review the economic situation in 2009 and 2010.”

Crude oil, which fell to a five-year low of $33.87 on Dec. 19, has rebounded as OPEC restricted supply. At its last meeting in December, members agreed to a record 9 percent reduction in supply targets effective Jan. 1, extending two earlier resolutions to curb production as the global economy sank into a recession, straining the budgets of crude exporters.

“This is very interesting because the Iranians, the Venezuelans, and Algerians are always the most bullish in terms of cutting no matter where inventories are,” said Hudson Capital’s Kornafel. “OPEC has been holding together very tightly and to see a differing of opinion like this in public is surprising.”

Hedge Funds

Hedge-fund managers and other large speculators decreased their net-long position in New York crude-oil futures in the week ended Feb. 24, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 28,749 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions fell by 16,267 contracts, or 36 percent, from a week earlier.

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