Oil falls to 3-year low on bleak US economic news

SINGAPORE: Oil prices fell to a 3-year low below $48 a barrel on Tuesday in Asia, as more bleak US economic news and plunging stocks markets darkened investor expectations for crude demand.

Light, sweet crude for January delivery was down $1.50 to $47.78 a barrel, the lowest since 2005, in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore.

The contract plummeted overnight $5.15 to settle at $49.28 after more signs of a weakening US economy sent the Dow Jones industrial average down 7.7 per cent.

Most Asian markets also sank Tuesday, with Japan's benchmark Nikkei 225 index falling 6.4 per cent, the Korea Composite Stock Price Index sliding 3.4 per cent and Hong Kong's Hang Seng index dropping 4.8 per cent.
Oil investors have looked to equity markets as a barometer of economic growth sentiment.

``The basic story remains the same; consumption worries continue to depress the oil market,'' said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney. ``Recent data out of the US and other countries backs up the view that consumption is weakening.''

The National Bureau of Economic Research reported that the US economy has been in a recession since December 2007 and the current downturn will last until the middle of 2009, the most severe slump since the 1981-82 recession.

What began as a financial crisis in the sub-prime mortgage sector has spread throughout the US economy, including industrial production. The Institute for Supply Management said its gauge of manufacturing activity fell more than expected to 36.2 in November. A reading below 50 indicates the sector is contracting.

The Commerce Department reported that construction spending dropped by 1.2 per cent in October, bigger than the 0.9 per cent decline many analysts expected.

Meanwhile, expectations of another production cut by the Organization of Petroleum Exporting Countries has failed to spark a rally in prices.

OPEC Secretary-General Abdullah El-Badri said the group would likely reduce output quotas by between 1 million and 1.5 million barrels at a meeting on Dec. 17 in Algeria, according to a report on Iranian state television Monday.

OPEC, which accounts for about 40 per cent of global supply, cut output by 1.5 million barrels a day in October, bringing total cuts to around 2 million barrels a day this year.

``We think by next year OPEC will be somewhat successful in tightening supply and underpinning prices,'' Moore said. ``You have to wonder where the oil price would be now without the OPEC cuts.''

Moore said he expects an average oil price of $74 a barrel for 2009.

In other Nymex trading, gasoline futures fell 1.83 cent to $1.09 a gallon. Heating oil dropped 2.24 cents to $1.59 a gallon while natural gas for January delivery slid 8.7 cents to $6.52 per 1,000 cubic feet.

In London, January Brent crude fell $1.88 to $46.09 on the ICE Futures exchange.