10 Dec 2008

Oil falls on forecast for shrinking demand

3:01 pm on 10 December 2008

Oil prices fell nearly 4% on Tuesday after the US government forecast the world economic slowdown would shrink global oil consumption this year for the first time since the early 1980s.

US crude fell $US1.64, or 3.75%, to settle at $US42.07 a barrel, after hitting a session low of $US41.83.

London Brent fell $US1.89 to $US41.53 a barrel.

The US Energy Information Administration said in its monthly energy outlook it expected global oil demand to fall by 50,000 barrels per day in 2008 and 450,000 barrels per day in 2009, marking the first time since 1983 that year-to-year world oil demand has dropped.

The lower forecast came as the administration revised its 2009 world GDP growth estimate to 0.5%, down from last month's estimate of 1.8%. It estimates 2008 GDP growth will end up at 2.7%.

Adding to the economic gloom, Japan sank further into recession in the third quarter, new European economic indicators showed the downturn there is deepening, and Canada declared itself in recession on Tuesday.

In the United States, negative retail sales data and tepid home sales figures disappointed Wall Street, which traded down after a two-day rally had contributed to sentiment that the stock market could have hit a cyclical bottom.

The global economic crisis has sent oil prices spiraling down from record peaks above $US147 a barrel in July, raising concern among members of the Organization of Petroleum Exporting Countries.

Analysts expect the group to reduce output by at least 1 million barrels per day when it meets next Wednesday in Algeria, after agreeing to cut supplies by 2 million barrels per day since September.