Oil caught in tug-of-war

Oil prices fluctuate, buoyed by early reports that OPEC members will implement production cuts but also pulled lower by dismal reports on the U.S. economy.

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By Kenneth Musante, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Oil prices fluctuated wildly Tuesday then settled slightly lower after a handful of dismal economic reports countered signs that OPEC nations were starting to comply with planned output cuts.

Crude for February delivery fell 23 cents to settle at $48.58 a barrel during trading. Oil hit a trading high of $50.47 earlier in the day, breaking $50 a barrel for the first time in four weeks.

Prices last touched $50 on Dec. 15, when crude hit an intraday high of $50.05.

New factory orders in the United States., the world's largest oil consumer, fell for the fourth month in a row in November, according to the government. Meanwhile a real estate group reported that the number of pending home sales in the United States fell 4% in November to their lowest level in at least 7 years.

"Clearly the contraction in demand is very significant, and is likely to continue for a while," said Antoine Halff, deputy head of research with brokerage Newedge USA in New York.

Oil prices have dropped from a record high of $147.27 a barrel last summer as investors worried that the waning economy was severely impacting appetite for petroleum-based fuel.

However oil prices have been on the rebound lately, rising nearly 40% since Christmas, as Middle East conflict, an energy contract dispute in Eastern Europe, and a planned production cut from the Organization of Petroleum Exporting Countries sparked concern about supply disruptions.

Retail gasoline prices have been turning higher as well. On Tuesday prices had risen to a national average of $1.688 a gallon from $1.672 on Monday, according to a survey from motorist group AAA.

Crude prices had risen earlier in the day after reports indicated that members of OPEC were complying with the group's largest planned production cut in history.

The economic reports that came out on Tuesday "kind of refocused the market on demand issues," said Halff. But the market was still getting "conflicting signals."

Production cuts: Several Asian oil buyers claimed to have received notices from the national oil companies of OPEC nations Kuwait and Iran, telling them to expect fewer deliveries this month, according to Reuters.

It's a sign that "they're trying to make an effort, and they're putting plans in place," said Nimit Khamar, an analyst with Sucden Financial in London.

The reports, which come from oil buyers rather than the countries themselves, constitute "actual proper evidence" that production is being reduced, according to Khamar.

OPEC, whose members produce about 40% of the world's crude oil, agreed last month to collectively cut production by 2.2 million barrels a day in order to bolster oil prices.

There has been some skepticism among analysts that members would be able to hold to their pledged production cuts.

The group had previously pledged to cut production by 1.5 million barrels a day last November, but production fell by only about 950,000 barrels a day, according to estimates from research firm Platts.

With the price of oil around $50 a barrel, many producers, particularly those such as Iran and Venezuela who rely on oil profits to sustain their economies, have been hard pressed to reduce those profits even further by pumping less.

"Iran in particular hasn't been great in keeping with quotas," said Khamar. The country's economy is geared toward oil prices around $70 a barrel, he added.

Two weeks ago the United Arab Emirates, another OPEC member, also indicated that it would be complying with production cuts.

Middle East and Russia: Global tension also shook the market as Israeli forces continued to battle Palestinian militants in the Gaza Strip and Russia continued its natural gas cutoff to Ukraine and the rest of Europe in a contract dispute.

The Gaza conflict, which does not involve major oil producing areas, sparked concerns that a major oil producing nation such as Iran may withhold supplies in protest.

An Iranian military commander called on Islamic nations Sunday to pressure Israel's Western allies by withholding crude oil supplies. However, with Iran's need for oil profits, such a scenario is "really hard to imagine," said James Cordier, founder of brokerage OptionSellers.com in Tampa, Fla.

Russia, which Europe relies on for much of its energy supplies, has been withholding deliveries of natural gas from the Ukraine after the two countries failed to agree on prices.

The dispute has already disrupted supplies of natural gas to Eastern European countries, including EU member Austria.

While the current dispute does not involve crude oil, it points out Europe's precarious position of relying on Russia for most of its energy needs, according to James Williams, energy economist with WTRG Economics in London, Ark. To top of page

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