Oil plummets on global demand report

U.S. inventory report also shows bigger-than-expected rise in crude supply.

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By Julianne Pepitone, CNNMoney.com contributing writer

Oil prices sank after one report said global demand for crude will continue to fall, and another said U.S. crude stockpiles increased.

NEW YORK (CNNMoney.com) -- Oil prices plummeted Wednesday after an international report said global demand for crude will continue to fall in 2009, re-igniting oversupply concerns.

The International Energy Agency reduced its predictions for demand to fall 84.7 million barrels per day in 2009, according to the monthly report.

That's a decrease of 570,000 barrels per day, compared to January estimates.

The IEA expects global consumption to decline one million barrels a day, or 1.1% year-over-year.

Light sweet crude for March delivery settled down $1.61 to $35.94 a barrel.

"Oil prices will have a tough time rising higher with such low demand," said James Cordier, president at Liberty Trading Group. "We're doing an inadequate job of cutting oil supply, plain and simple."

Oversupply in inventory report: Earlier in the day, a weekly inventory report revealed soaring U.S. crude stockpiles.

The Energy Information Administration said crude stocks increased by 4.7 million barrels in the week ended Feb. 6. Analysts were looking for an increase of 3.4 million barrels.

Oil prices peaked at a record high of $147.27 a barrel in July 2008 but have plummeted due to the steep drop in demand.

The large energy companies that distribute the oil "are buying hand-to-mouth," Cordier said. "They're doing everything they can to keep inventory down."

They'll continue to buy the bare minimum until they see any sign of the economy brightening - even in the far future, Cordier said.

OPEC: In response to the growing crude stockpiles, the Organization of the Petroleum Exporting Countries - whose members produce about 40% of the world's crude - has been pressured to boost oil prices amid the weakened global demand.

OPEC attempted to cut production by 2.2 million barrels per day in January, and the group's secretary-general Abdullah al-Badri hinted that more cuts may be coming. About 80% of the previously discussed cuts were complete, al-Badri told reporters Monday.

"That figure sounds really high," Cordier said. "A lot of investors believe it's closer to 65-70%. They want more confirmation on these numbers."

Al-Badri also noted the group may take more action at its next meeting, which is scheduled for March 15.

Geithner's plan: Larger macroeconomic concerns also have weighed on crude prices lately.

On Tuesday, oil dipped to a three-week low as Treasury Secretary Tim Geithner's plan to boost the suffering financial system received a lukewarm response and was criticized as lacking detail.

Geithner said the program could provide U.S. banks with up to $1 trillion in new capital.

"The stimulus package announcement crushed hopes," Cordier said. "The market was nervously awaiting an actual plan - but clearly, they have no details."

Gasoline: Stockpiles of gasoline decreased by 2.6 million barrels, according to the EIA report. Analysts were looking for an increase of 900,000 barrels.

"The refineries are trying so hard to improve their margins, and they're doing a great job of it," Cordier said.

The EIA report said the refinery rate fell 1.9 percentage points to 81.6% of capacity, far exceeding the expected 0.5 percentage point decrease.

Gas prices are inching higher because of the large decrease in the refinery utilization rates, Cordier said.

The national average price for a gallon of regular unleaded gasoline increased 1.2 cents Wednesday to $1.94, according to the daily survey conducted for motorist group AAA.

The EIA report also noted that distillates, used to make heating oil and diesel fuel, decreased by 1 million barrels. Analysts were looking for a decrease of 1.8 million barrels.

Outlook: The U.S. is by far the largest oil consumer, so the nation's economic future is "the entire ball game right now," Cordier said.

Fundamentally, oil prices are still weak, he said. But Cordier added that the upcoming summer driving season should boost gas prices as much as 20 cents in the next several weeks, which will boost crude prices.

Cordier said he expected oil prices to rally $2-$5 over the coming weeks, and the April contract could climb near $50 a barrel.

"With warmer temperatures in the Northeast during these months, all oil prices need is for the stock market to stop falling - not even a rally," he said.

In the second half of 2009 crude prices could trade in the low-to mid-$50 mark, but likely not above $55, Cordier said.

"The market is watching for something in the stimulus package to take hold," he said. "They're hoping, wishing, for something good." To top of page

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