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Oil continues lower below 90 usd mark on economic slowdown fears

Monday, January 28, 2008

LONDON (Thomson Financial) - Oil prices continued to trade down below the 90 usd mark heading into the afternoon in London, as lower stock markets again sparked fears of an economic slowdown denting demand for crude.

"Financial markets in Europe and Asia fell lower following comments by Goldman Sachs who said the Japanese economy has probably fallen into a recession already," said Nimit Khamar at Sucden. "The economic problems in the US and Japan will be a major concern for the oil market given that they are 2 of the 3 largest consumers of oil".

At 12.48 pm, New York's WTI crude for March delivery was down 1.34 usd at 89.37 usd per barrel.

In London, Brent crude for March delivery was down 1.04 usd at 89.86 usd per barrel.

Prices have declined by over 10 pct since hitting an all time record high above 100 usd a barrel in the early days of the New Year. While weakness in stock markets has weighed on the demand outlook, it has also forced the liquidation of many long speculative positions in crude, as funds scramble to cover losses on falling equities.

"According to the US Commodity Futures Trading Commission the speculative net long position fell by 56 pct from the week before, which is a concern for those oil bulls as hedge fund money has been a key driver to prices surging so high," said Khamar at Sucden.

Oil has tracked volatile equity markets in recent weeks but some predict that the focus is soon to turn to OPEC's meeting on Friday, where the cartel is widely expected to leave production unchanged. All 27 analysts polled by Thomson Financial News expect OPEC ministers to decide against an output increase.

OPEC ministers have consistently argued that oil's rally up to the 100 usd mark was fuelled more by speculators in the market rather any tightness of supply, reducing the likelihood the cartel will up production, according to Bank of Ireland analyst Paul Harris.

"As the stock markets have fallen, margin calls and flight to liquidity have seen long oil positions unwound. This adds substance to the long held view by OPEC that the price appreciation has much to do with speculation rather than supply constraints. The probability is that there will be no change in production quotas."

With real concerns over the state of the economic outlook still dominating moves in oil, some market watchers have started to flag the slight possibility of an OPEC production cut.

"Some (OPEC ministers) are already talking about a cut, and we are sure that Venezuela and Iran will be leading the charge," said Peter Beutel, president of Cameron Hanover.

"OPEC usually cuts output in March or April and global demand typically does make its low in those two months. If one throws in a risk of recession, the argument is complete".

Weakness in the US dollar has seen many OPEC members become more hawkish on price, as oil revenues and currency reserves have taken a blow, analysts said.

The risk to the cartel is that another spike in oil prices back towards the 100 usd mark could tip struggling economies into recession, ultimately denting demand for crude and encouraging further investment into alternative fuel sources.

While prices have retreated from their record highs, they still remain at historically elevated levels. Before September of last year, prices had never closed above the 80 usd mark.

Posted by MOHAMED SAID at 5:42 AM  

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