Oil Below $79 as Fears Grow Over Economy

Tomahawk, WI 9/23/2011 (PennyPayDay) – Oil prices continued to fall sharply on Friday, retreating $2 to below $79 a barrel amid falling equity markets and the prospect of weaker demand for crude as the global economy slows.

By early afternoon in Europe, benchmark oil for November delivery was down $2.07 to $78.44 in electronic trading on the New York Mercantile Exchange. Crude plunged $5.41, or 6.3 percent, to settle at $80.51 on Thursday.

In London, Brent crude for November delivery was down $1.45 at $104.04 on the ICE Futures exchange.

Crude has dropped more than 10 percent, from above $90 last week, as investors fret that Europe's debt crisis -- EU officials have begun to speak openly of the possibility of a Greek default -- and a weak U.S. economy will stymie oil demand.

"Time is running out for Europe, and as a result, it is perhaps running out for the whole world," said James Swanson, chief strategist at MFS Investment Management.

A pledge by countries which account for 85 percent of the global economy, the Group of 20, to restore stability to the world's financial system lifted markets early Friday but that support quickly eroded and indicators fell back into red.

"This morning, we saw a few signs of a correction in the oil market; however, gains proved to be short-lived as crude oil prices reversed and continued their downside momentum tracking fresh losses in global equity markets," said a report from Sucden Financial Research in London.

The worsening global outlook has pounded stock markets, which oil traders look to as a gauge of overall investor sentiment. The Dow Jones industrial average sank 3.5 percent Thursday and the leading Asian and European stock markets fell Friday by as much as 2.5 percent.

The dollar also gained against the euro and weighed on oil prices by making crude more expensive for investors with other currencies.

Signs of weakening industrial production in China this week have analysts predicting that Asian demand for commodities could be slowing.

"The main risk for the region remains the highly uncertain outlook for the global economy," Capital Economics said in a report. "Another global downturn on the scale of that seen in 2008-2009 would see the region's exports plunge."

Some analysts still expect crude demand to outstrip supply and send prices higher. Goldman Sachs reiterated its forecast Brent crude will average $130 next year.

"Global crude oil markets continue to be torn between heightened concerns over the global economic outlook and the continued resilience of crude oil fundamentals," Goldman said in a report. "It is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand."

Others said the psychological impact of the sell-off and the falling markets could push government officials and lawmakers in the U.S. and Europe to act more decisively on economic issues, which, in turn, could encourage investors.

"Markets are capable of turning around rather sharply if investors sense that the politicians are finally 'getting it' and making progress in working together," said senior commodity analyst Edward Meir of MF Global in New York.

In other Nymex trading for November contracts, heating oil fell 3.24 cents at $2.8255 per gallon and gasoline futures lost 0.83 cent to $2.5354 per gallon. Natural gas for October delivery added 3.3 cents to $3.738 per 1,000 cubic feet.

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