Oil prices continue slide

Crude prices fall slightly as demand worries persist after surprise decline in U.S. inventory.

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By Kenneth Musante, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Oil prices fell to another 3-1/2 year low Wednesday, even after a government report showed a surprise decline in oil stockpiles last week.

U.S. crude for January delivery fell 17 cents to settle at $46.79 a barrel, the lowest settle price since May 24, 2005.

A report from the Energy Information Administration showed a surprise drop of 400,000 barrels of crude oil stockpiles, after being expected to increase by 2 million barrels, according to a poll of analysts from research firm Platts.

Last week, the report showed crude stockpiles spiked more than expected, driving prices lower.

Wednesday's price decline was much smaller, as the inventory report helped balance out the previous week's reaction, according to Rachel Ziemba, energy analyst at analysis firm RGE Monitor.

"[Refiners] are wary of having inventories build up too quickly," said Ziemba. "In an environment where demand is falling , you don't want to end up with goods you can't sell," she said.

The government report also showed a 1.6 million barrel decline in supplies of motor gasoline, and a 1.7 million barrel decrease in supplies of distillates, which are used to make diesel fuel and home heating oil.

Analysts expected a 1.1 million barrel rise in gasoline supplies, and a 900,000 barrel increase in supplies of distillates, according to Platts.

Demand and economy: Investors have been concerned about falling demand as the global economy slows, and crude prices have plummeted more than $100 a barrel since hitting a record high of $147.27 a barrel in mid-July.

"Does [the report] really matter as much if global demand is faltering?" asked Phil Flynn, senior market analyst with Alaron Trading in Chicago.

Even if the report fails to indicate that U.S. demand has not declined as much as expected, "the rest of the world still lags," said Flynn.

In its inventory report, the government added that the U.S. consumed gasoline at a rate of 8.9 million barrels a day over the past four weeks, a 3.2% decline from the same period last year.

Oil prices dropped back below $50 a barrel earlier in the week, reaching prices not seen since February 2005.

And demand will likely continue to decline into the new year, said Ziemba.

"Given the economic outlook [for 2009], I'm not expecting a big pickup in oil demand," she said.

A series of negative economic reports continued to hammer oil prices Wednesday.

In the U.S., companies announced almost as many layoffs in November in an attempt to cut costs as they did in January 2002 after the Sept. 11 terror attacks according to the report by Challenger, Gray & Christmas an outplacement firm.

Also the Big Three automakers GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler upped the pressure on Congress for bailout money. Automakers are now asking for up to $34 billion - almost $10 billion more than was previously anticipated.

However, even an auto bailout may not be enough to bring crude demand back to previous levels, according to Flynn.

"Just because you throw a bunch of money at the auto companies, that doesn't mean people are going to start buying cars," said Flynn.

China: Furthermore, China - the world's second-largest oil consumer whose rapid economic growth had encouraged oil's meteoric increase in price through the first part of the year - is facing increasing economic difficulties, according to Treasury Secretary Henry Paulson.

Paulson spoke Tuesday before leaving for Beijing to encourage the country to strengthen its currency.

Manufacturing activity in China plunged in October, according to reports from two trade organizations.

Meanwhile shares of Chinese financial giants are in trouble as well, with the Industrial and Commercial Bank of China losing close to a third of its value last month.

"We've seen a major shift in the economic growth prospects of the world," said Flynn. To top of page

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