Oil stays below $50 over economic jitters

March 31, 2009 5:15:40 AM PDT
Oil prices recovered Tuesday in tandem with European stock markets but remained below $50 a barrel as fears of a major automaker bankruptcy in the U.S. sparked renewed jitters over the global economy. Benchmark crude for May delivery was up $1.19 to $49.60 by midday in Europe in electronic trading on the New York Mercantile Exchange. On Monday, the contract fell more than 7.6 percent, or $3.97, to settle at $48.41.

In London, Brent prices gained $1.48 to $49.47 a barrel on the ICE Futures exchange.

Traders said the White House's move on Monday to refuse further long-term federal bailouts for General Motors Corp. and Chrysler cast a cloud over the struggling auto industry and raised concerns for the overall economy.

"A possible bankruptcy threatening GM and Chrysler caused the stock market to tumble and worries about the economy have returned to the forefront," said Victor Shum, an energy analyst at consultancy Purvin & Gertz in Singapore.

It will be tough for crude prices to return to the $50 a barrel mark as market fundamentals remain weak, he said.

Most energy market analysts found no fundamental reason for a rally this month that pushed oil prices from $40 per barrel to more than $50. Crude inventories continue to build even with OPEC cutting production and domestic producers suspending oil projects.

Instead, oil prices have been taking their cue from stock markets and the U.S. dollar. On Tuesday, both were providing support for crude prices, as stock prices rose in Europe and the dollar was weaker against the euro and British pound, increasing the attractiveness of commodities like oil and gold as a hedge against inflation and currency weakness.

Jim Ritterbusch, president of energy consulting group Ritterbusch and Associates, said he expects oil to fall as low as $47 in advance of a U.S. crude inventory report, the monthly unemployment report and a meeting of the Group of 20 world leaders in London - all this week.

The Organization for Economic Co-Operation and Development said Tuesday it expected the U.S. economy to contract by 4 percent in 2009 and stagnate in 2010, while the 16-nation euro-zone will likely shrink by 4.1 percent this year and by 0.3 percent next year.

The OECD also forecast Japanese output to contract by 6.6 percent in 2009 and another 0.5 percent next year.

Shum said the U.S. crude report is widely expected to a show further build up in inventories, which will exert more downward pressure on prices.

The U.S. government last week said crude storage facilities were brimming with more oil than they've had in 16 years. Combined with the strategic petroleum reserve, the nation now has 1.05 billion barrels of oil in storage - enough to fuel roughly 44 million cars for a year.

The Organization of Petroleum Exporting Countries has promised to slash production by 4.2 million barrels per day, but there are doubts about the level of compliance by OPEC members.

Shum said there is still optimism that the U.S. economy, the world's largest, could recover later in the year thanks to the government's stimulus spending and plans to buy toxic assets from banks. In the near term, he expects oil to trade between $45 and $50 a barrel.

In other Nymex trading, gasoline for April delivery gained 2.01 cents to $1.40 a gallon while heating oil rose 2.33 cents to $1.3659 a gallon. Natural gas for May delivery added 7.6 cents to $3.815 per 1,000 cubic feet.

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Associated Press writer Eileen Ng in Kuala Lumpur, Malaysia, contributed to this report.

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