Oil slips on global recession fears; $50 bottom possible

Pessimistic economic forecasts are strenghtening expectations that crude prices still have some way to go before they bottom out. Trader and analyst Stephen Schork suggested that US$50 “is now within the realm of possibilities.”

By GEORGE JAHN
The Associated Press

10/15/2008

VIENNA, Austria — Oil prices were nudged lower early on Wednesday by concerns that a massive bank bailout by the U.S. and Europe won’t keep the global economy from slipping into a severe slowdown.

Beyond fears that demand would slow, expectations that the latest snapshot of U.S. crude supplies would show additional builds also weighed on markets.

Light, sweet crude for November delivery was down 61 cents to US$78.02 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. The contract fell US$2.56 overnight to settle at US$78.63.

“People are worried that the world economy is heading for recession,” said Gerard Rigby, an energy analyst at Fuel First Consulting in Sydney. “The bailout may save the banks, but companies are still laying off workers and demand is going to suffer.”

The U.S. plans to spend as much as US$250 billion this year of a US$700 billion bailout buying stock in private banks, President George W. Bush said Tuesday. Governments across the globe have pledged more than US$3 trillion to prop up ailing banks in a bid to stabilize a credit crisis that began last year in the U.S. sub-prime mortgage market.

Former U.S. Federal Reserve Chairman Paul Volcker said Tuesday the U.S. and Europe face a “considerable recession.”

“The banks might be ok, but the rest of the economy needs help as well,” Rigby said.

Such pessimistic voices are strenghtening expectations that crude prices still have some way to go before they bottom out. Trader and analyst Stephen Schork suggested that $50 “is now within the realm of possibilities.”

Investors are also watching for signs of slowing U.S. demand in the weekly oil inventories report to be released Thursday from the U.S. Energy Department’s Energy Information Administration. The petroleum supply report was expected to show that oil stocks rose 3.1 million barrels last week, according to the average of analysts’ estimates in a survey by energy information provider Platts.

The Platts survey also showed that analysts projected gasoline inventories rose 3.1 million barrels and distillates went down 850,000 barrels last week.

Crude stocks have grown as oil installations in the Gulf of Mexico began operating again after being shut down by Hurricane Ike last month.

“There is some demand destruction in that forecast, but there’s also hang over from the hurricane as refineries come back on line,” Rigby said.

In other Nymex trading, heating oil futures rose by more than a penny to US$2.28 a gallon, while gasoline prices fell slipped by over a cent to US$1.89 a gallon. Natural gas for November delivery was basically flat at 6.73 per 1,000 cubic feet.

In London, November Brent crude was down 31 cents to US$74.22 a barrel on the ICE Futures exchange.

Associated Press writer Alex Kennedy contributed to this report from Singapore.