AP
Oil Off on Economy Fears, OPEC Forecasts
Tuesday November 27, 4:47 pm ET
By John Wilen, AP Business Writer
Crude Oil Plunges on Worries About Economic Slowdown, Rising Belief That OPEC Will Lift Output


NEW YORK (AP) -- Oil prices plunged Tuesday, picking up downward momentum amid concerns that a slowing economy might reduce demand for crude just as OPEC members are considering an increase in production. Prices were also pressured by apparent progress at the Mideast peace summit in Annapolis, Md.

Light, sweet crude for January delivery dropped $3.28 to settle at $94.42 a barrel on the New York Mercantile Exchange. The contract is nearly $5 below its all-time high of $99.29 set last week.

Stocks dropped sharply Monday, reigniting worries among energy traders that the economy is slowing and will use less oil and gasoline. Wall Street rebounded Tuesday, but the oil market was still clearly uneasy.

Both the International Energy Agency, an energy policy adviser to 26 predominantly Western industrialized nations, and OPEC have recently cut their demand forecasts for the rest of this year and next year, in part because of high prices.

Meanwhile, there is increasing evidence that Organization of Petroleum Exporting Countries oil ministers will decide at a meeting next week to boost production, and a number of reports suggest several OPEC countries are already exceeding their output quotas.

In recent days, several OPEC ministers have said their nations are ready to boost oil output to bring down high oil prices, which have approached $100 for several weeks. On Tuesday, Dow Jones Newswires, citing an unidentified OPEC official, reported that the cartel is mulling an increase of 750,000 barrels a day. Analysts speculate that the cartel will boost production by anywhere from 500,000 to 1 million barrels a day. OPEC ministers meet Dec. 5.

Two research reports last week suggested OPEC has already increased production, and Saudi Arabia's oil minister said Tuesday the kingdom is producing 9 million barrels a day, more than its quota, according to Dow Jones.

"You have OPEC coming to the rescue," said James Cordier, president of Liberty Trading Group in Tampa, Fla. "Near $100 (a barrel), a small change in supply ... is enough to tip the balance."

Indeed, several analysts believe the oil market has begun its long-awaited correction, or sharp move lower.

"I think this is it," said Phil Flynn, an analyst at Alaron Trading Corp., in Chicago. "There should be some concern about some slowdown in the economy."

Contributing to the economic worries Tuesday was a report that the New York-based Conference Board's Consumer Confidence Index dropped to 87.3 in November, its lowest reading since October 2005.

"There's a lot more recession talk the last two, three days," Cordier said.

The prospect of peace in the Middle East also pressured prices. Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas agreed to resume negotiations with a goal of creating an independent Palestinian state by the end of next year. The risk of a widening conflagration in the region has long supported oil prices by threatening to disrupt crude supplies.

"Any steps toward peace would be bearish for oil," Flynn said.

At the pump, meanwhile, gas prices regained some of the ground they lost over the last week, rising 0.6 cent overnight to a national average of $3.091 a gallon, according to AAA and the Oil Price Information Service. Several weeks ago, analysts predicted gas prices would rise another 10 to 15 cents a gallon to catch up with oil prices, which have skyrocketed 43 percent since August. When oil's rise toward $100 a barrel stalled, analysts revised those forecasts.

Gas prices, which typically lag the futures market, are still more than 2 cents below their most recent peak, and are expected to remain flat or even fall a little unless oil rises to $100 a barrel, or higher.

Traders are anticipating Wednesday's release of inventory data by the Energy Department's Energy Information Administration. Analysts surveyed by Dow Jones Newswires on average predict crude inventories fell by 500,000 barrels during the week ended Nov. 23, while refinery use rose by 0.6 percentage point to 87.6 percent of capacity.

Inventories of distillates, which include heating oil and diesel fuel, likely fell by 1 million barrels, while supplies of gasoline likely rose by 600,000 barrels, the analysts predict.

Other energy futures also fell on the Nymex Tuesday. December heating oil futures fell 5.32 cents to settle at $2.6534 a gallon, while December gasoline futures fell 6.84 cents to settle at $2.373 a gallon.

Natural gas futures slipped 16.6 cents to settle at $7.557 per 1,000 cubic feet.

In London, January Brent crude lost $2.80 to settle at $92.52 a barrel on the ICE Futures exchange.