US oil prices fell more than 7 percent to below $35 a barrel on Tuesday as grim economic indicators battered markets and raised concerns about slumping demand. A new report suggesting eastern Europe's economic slump will drag Western banks further into the red fanned fears that emerging economies will deepen the recession in the West.
No 3 oil consumer Japan has suffered a sharper contraction than other major economies because of its heavy dependence on exports combined with persistently soft domestic demand. US crude for March delivery fell to $34.82 a barrel by 14:08 pm EST (1908 GMT), down $2.69 from Friday's close. Floor trade on the New York Mercantile Exchange was shut on Monday for the Presidents Day holiday, although there was electronic trade.
London Brent crude for April delivery dropped $1.91 to $41.37 a barrel. The credit crisis has pushed much of the world into recession, depressing fuel demand and sending crude oil prices down sharply from record highs over $147 a barrel in July. "The economic outlook will continue to dominate the first half of 2009. The United States, eurozone and Japan are in synchronised recession," Harry Tchilinguirian, oil analyst at BNP Paribas, said.
"Opec supply cuts are only going to impact consuming country inventories with a lag." Algerian Oil Minister Chakib Khelil reiterated that the Organisation of the Petroleum Exporting Countries would be more likely to cut oil production again in March, if prices remained below $40 a barrel. Earlier, Iraq's oil minister, Hussain al-Shahristani, said Opec should look to further cuts in supply, if curbs to date fail to balance the market.
The producer group agreed to a series of deep output cuts during the second half of 2008 in order to help counter the drop in demand and prices. US President Barack Obama was due to sign a $787 billion economic stimulus bill into law on Tuesday, but investors were fearful that the measure would not help soften the impact of the 14-month-old recession soon enough. US stocks tumbled on fresh signs the economic recession is worsening.
Factory activity in New York state fell to a record low in February, with new orders and employment falling sharply as the US recession deepened, according to a survey. US crude for March delivery, which expires on Friday, was trading at a $4.30 discount to April crude due to high inventories at the storage hub in Cushing, Oklahoma, the delivery point for the US futures contract.
Brimming US stocks are also keeping US crude at an atypical discount to Brent crude. Russia signed its biggest energy deal with China on Tuesday, under which its oil companies will receive $25 billion in loans in exchange for long-term crude supplies, a source close to the talks told Reuters.
A Reuters analyst poll ahead of weekly US inventory data forecast crude stocks rose by 2.6 million barrels in the week to February 13, while gasoline and distillate stocks fell. The forecasts were issued ahead of weekly inventory data to be released by the American Petroleum Institute on Wednesday and by the US Energy Information Administration on Thursday. Both reports were delayed a day by the US holiday.