Oil gives up early gains on more bad economic news

COLUMBUS: Oil prices gave up early gains on Tuesday as fresh signs of a deepening US recession trumped tensions in the Middle East and worries over natural gas shortages in Europe.

Light, sweet crude for February delivery rose 71 cents to $49.52 a barrel in trading on the New York Mercantile Exchange. Prices had risen as high as $50.47, the highest point since Dec. 1, before the National Association of Realtors reported that pending home sales fell to the lowest level on record in November. The plummeting stock market and faltering economy has led potential buyers to hold back.

A natural gas dispute between the Ukraine and Russia, however, did effect natural gas prices in the United States.

The dispute shut down gas supplies to six countries and reduced gas deliveries to several others.

At least two Bulgarian cities were totally without gas, and nations like Turkey were turning to Iran to bolster their supplies.

Traders began to sell once oil reached $50 and began to realize that geopolitical problems were not enough to justify the rally, said Phil Flynn, an analyst at Alaron Trading Corp.

``At the end of the day it hasn't cost us one drop of oil yet,'' he said of the problems in the Middle East and Europe.

Still, heating oil, which is a proxy for fuel oil in Europe, spiked 4.5 per cent with expectations that customers there will switch from natural gas.

In a separate report, the government said orders to factories fell for a record fourth straight month in November. The 4.6 per cent decline was nearly double the 2.5 per cent drop economists expected.

The Realtors group said its seasonally adjusted index of pending sales for existing homes fell 4 per cent to 82.3 from a downwardly revised October reading of 85.7 in October.

That's worse than was expected by economists surveyed by Thomson Reuters and the lowest reading in the eight-year history of the index.

The Commerce Department said weakness in factory orders in November reflected a big drop in demand for commercial aircraft. Weakness also was seen in autos, primary metals such as steel, and defense communications equipment.

Orders have been falling since August, including a 6 per cent plunge in October, the biggest setback in eight years.

Meanwhile, an index of activity in the US services sector contracted at a slower pace in December as new orders and employment improved. In a surprisingly upbeat reading, the Institute for Supply Management, a trade group of purchasing executives, said its services sector index rose to 40.6 in December from 37.3 in November. Wall Street economists surveyed by Thomson Reuters had expected the index to slip slightly to 37.0.

The index continues to signal the sector is contracting. A reading below 50 signals contraction, while a reading above 50 indicates growth.

A panel of academic economists with the National Bureau of Economic Research, the group officially responsible for declaring recessions, said in November that the recession began in December 2007 - making the current downturn the longest since the 16-month slump from July 1981 to November 1982 and threatening to be the longest since 43-month-long downturn from August 1929 to March 1933.

The weak reports were more than enough to offset global tensions. Israeli forces continued their push into Gaza, edging closer to Gaza's major population centers and attacking new sites.

Prices also have been bolstered by signs the Organization of Petroleum Exporting Countries, which generates 40 per cent of the world's oil production, is implementing production cuts of 4 million barrels a day that the group has announced since October.

In Europe, a contract dispute between Russia and Ukraine shut off Russian gas supplies to six countries and reduced gas deliveries to several others.

There are worries that the tensions in the Middle East could spread to oil-producing nations, said Jim Ritterbusch, president of Ritterbusch and Associates. The concern in Europe is that there will be more demand for fuel oil and a product similar to heating oil until the dispute is resolved, he said.

But Ritterbusch said he believe prices will be headed back down as demand for energy remains weak. He said traders were looking to Wednesday's government on inventory levels of oil supplies.

In other Nymex trading, gasoline futures rose 2.8 cents $1.21 a gallon. Heating oil rose 7.4 cents to $1.65 a gallon while natural gas for February delivery fell 3.6 cents to $6.036 per 1,000 cubic feet.

In London, February Brent crude rose $1.58 to $51.20 a barrel on the ICE Futures exchange.