Oil falls after Fed rate cut

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NEW YORK (CNNMoney.com) -- Oil prices tumbled Tuesday after the Federal Reserve lowered its key interest rate and said economic conditions remain weak, underscoring concerns about faltering demand for energy.

U.S. crude contract for January delivery fell 91 cents to settle at $43.60 a barrel on the New York Mercantile Exchange.

The retreat comes after the Federal Reserve said it has established a "target range" of 0% to 0.25% for its benchmark interest rate. The rate had been at 1%.

In addition to the interest rate cut, the Fed signaled that it will continue to use unconventional methods to boost economic activity.

Oil was hovering near $44.50 a barrel just before the Fed announcement and fell below $43 a barrel immediately after.

Meanwhile, concerns about a global economic recession and its impact on demand for petroleum-based fuels continue to pressure the oil market.

Crude prices have fallen more than $100 a barrel since hitting a record high of $147.27 in mid-July.

Last week, the U.S. Department of Transportation said that Americans drove 100 billion fewer miles between November 2007 and October 2008, compared to the prior year.

"Small changes in our demand are big on the global level," said Michael Lynch, president of energy consultancy Strategic Energy & Economic Research.

Transportation Secretary Mary Peters noted last week that driving continued to decline even as gas prices came off their summertime peaks. Average U.S. gas prices have fallen by more than $2 a gallon from a record high $4.114 in July.

Gas prices bottomed out this weekend, ending an 86-day streak of declines at $1.66 a gallon, on average, according to motorist group AAA.

Oil supplies: In the United States, investors also awaited a report on domestic crude oil inventories scheduled for release Wednesday.

The Energy Department is expected to report a 900,000 barrel decline in crude supplies last week, according to analysts polled by research firm Platts.

Supplies of motor gasoline are expected to have risen by 1.5 million barrels, and stocks of distillates, which are used to make diesel fuel and home heating oil, were expected to have fallen by 1.8 million barrels, according to the Platts survey.

Fed rate cut: The Federal Reserve met to decide whether it will cut a key interest rate.

The Fed was widely expected to cut its key interbank lending rate to 0.5% on Tuesday, the lowest level on record, in order to boost the economy.

A cut in interest rates will take time to filter through the economy and affect oil consumption, according to Lynch.

OPEC and Russia: Delegates from the Organization of Petroleum Exporting Countries, an international trade group whose members produce about 40% of the world's oil, began arriving in Oran, Algeria, to discuss whether they will bolster crude prices by reducing production levels.

The group is expected to pledge a large production cut after the meeting Wednesday.

"If they don't cut, then inventories are going to keep building at a time when demand is going down, and that puts pressure on the price," said Lynch.

Oil producers have watched their profits decline as crude prices plummeted.

Upon arriving on Oran Tuesday, Saudi Arabian oil minister Ali al-Naimi said OPEC will cut production by 2 million barrels a day, according to reports. However the group is not scheduled to make an official announcement until Wednesday.

Some analysts have predicted the group may pledge to take as much as 3 million barrels a day off the market in order to bolster prices.

"I think there's also some skepticism whether or not OPEC is going to stick to that cut," said Brian Hicks, commodity fund co-manager at U.S. Global Investors in Texas.

Because oil prices have fallen so far, there's a lot of pressure on producers to pump as much as they are able, according to Hicks.

But what caught the eye of many investors was the arrival in Oran of a high-level delegation from non-OPEC member Russia, the world's second-largest oil producer after Saudi Arabia.

The Russian delegation is led by the senior energy official, Deputy Prime Minister Igor Sechin, Energy Minister Sergei Shmatko and top executives from Russian oil firms Rosneft and LUKOIL, according to reports.

Russia's high-profile presence at the meeting added weight to speculation that the country could coordinate with OPEC on a production cut.

OPEC has been seeking a pledge from Russia to cut production by as much as 300,000 barrels a day, according to news reports.

"They'll at least promise a cutback of several hundred thousand barrels a day," said Lynch.

However, Lynch said Russia may count some of the production that it has already taken offline as part of that total. "It's partly Russia under (President Dmitri) Medvedev flexing its political muscle," he said.

Ben Rooney contributed to this report.