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Oil drops sharply as demand worries persist amid downturn in global equities

Wednesday, January 23, 2008

LONDON (Thomson Financial) - Oil dropped sharply as global equities turned lower, indicating markets were as yet unconvinced yesterday's emergency rate cut by the US Federal Reserve will stave off a recession in the world's biggest oil consumer.

The Fed yesterday announced an emergency rate cut of 75 basis points -- its biggest cut in more than 25 years -- in a bid to stave off a possible US recession and prevent a sell-off in equity markets.

However, players have taken the move to indicate problems in the US economy are worse than originally feared, and that the rate cuts to date are simply not enough to cushion the US economy.

In addition, markets in Europe have turned lower on reduced hopes that central banks in the US and Europe will cut rates in a bid to defend their economies from the knock-on effects of a possible US recession.

"The reiteration by the Bank of England and European Central Bank of inflation as the prime focus, has dashed hopes that they may have followed the US with an emergency cut," said GFT Global Markets analyst Martin Slaney.

He added: "Overall, market confidence is low. Every rally we have seen recently has been sold into - a classic sign that we are entering into, if not already in, a bear market".

At 1.45 pm, New York's WTI crude for March delivery, the new front month contract, was down 1.87 usd at 87.36 usd.

In London, Brent crude for March delivery was down 1.55 usd at 86.90 usd per barrel.

Analysts said with US stock futures pointing lower at present, oil market players are being driven to close out or sell oil positions to cover margin calls on falling equities.

They added that confidence remains depressed, with players in both the oil and commodity markets waiting for further rate cuts by the Fed before stepping back into what are increasingly risky markets.

"What has plugged the hole in the markets for now is not so much the emergency cut we have had but the anticipation of more cuts in the near future. Fed funds futures show a half point cut is already expected," said Slaney.

Elsewhere, players are awaiting tomorrow's inventory data from the US Energy Department, which is being released a day later than usual because of the public holiday on Monday.

The data is expected to show US crude and gasoline stocks both rose last week and, according to MF Global analyst Ed Meir, it could also show that US demand has finally started to give way after months of holding steady.

As such, there is little hope that oil markets will receive a boost from tomorrow's inventory data.

On the plus side, however, analysts note that oil inventories are at low levels and they could well remain so if the OPEC members refuse to raise output at their meeting next month.

Qatar's Energy minister Abdullah bin Hamad al-Attiyeh said yesterday there is no need for OPEC to increase production, adding that in his opinion the markets are "adequately supplied."

US leaders have been piling pressure on OPEC to up its output in a bid to stabilise oil markets and help protect the global economy against the inflationary impact of high oil prices.

Petromatrix analyst Olivier's Jakob said not only is the cartel unlikely to heed these calls, it could even be considering an emergency output cut to help shore up oil prices.

"When oil comes tumbling down OPEC pulls an emergency cut and when the Dow comes tumbling down the Fed does the same," he noted.

Posted by MOHAMED SAID at 6:37 AM  

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