Oil falls as DOE slashes energy demand forecast

HOUSTON -- Oil prices wavered Tuesday amid new reports that the anemic global economy will lead to an even sharper falloff in energy consumption through 2009.

In heartening news for U.S. consumers, however, a new government said home heating costs should be lower this winter than last, and gasoline prices continued to tumble. Pump prices are at their lowest levels in nearly four years.

Light, sweet crude for January delivery fell 39 cents to $43.32 a barrel in midday trading on the New York Mercantile Exchange, after dipping below $43 in earlier electronic trading.

Prices have rebounded from last week's intraday low of $40.50 per barrel, the cheapest oil has been since December 2004.

In its short-term outlook released Tuesday, the U.S. Energy Information Administration said it expects global oil consumption to decline by 50,000 barrels a day this year and by 450,000 barrels a day in 2009, well below earlier forecasts on both counts.

Just last month, the EIA projected global consumption to increase by 100,000 barrels a day in 2008 and to remain flat in 2009. Total world consumption is between 85 million and 86 million barrels a day, according to the EIA.

Should the projections prove true, it would mark the first time in three decades that world crude consumption declined in consecutive years, the EIA said.

"If the world economy recovers sooner or is stronger than EIA now anticipates, oil consumption could decline at a slower rate or potentially increase instead, putting upward pressure on oil prices," the EIA said in Tuesday's report.

On the supply side, all eyes are on OPEC, although some even question if a big production cut expected to be announced next week will curb crude's stunning 70 percent free-fall over the past five months.

Expectations of an output cut may have helped oil prices come off 4-year lows touched last week, but analysts are now wondering how large an impact that would have amid a spreading recession.

Oil prices may also be getting some support from word that President-elect Barack Obama plans to implement a major infrastructure program to help boost employment in the weakening U.S. economy.

"Oil should find support around $40 a barrel and should form a bottom there," said Aaron Smith, who helps manage about $1.7 billion as managing director at Superfund Financial in Singapore.

Smith, who uses technical analysis to help guide his investment decisions, has recently reduced bets that the price of oil will go down, known as shorting.

"We've reduced the size of our short positions in oil dramatically over the last couple months," said Smith, who invests half his fund in commodity futures contracts. "But if it breaches that $40-$41 level, it could really keep moving."

The EIA projected oil prices to average $51 a barrel in 2009, down sharply from last month's forecast of $63.50 a barrel.

Investors are watching for signs of how much the Organization of Petroleum Exporting Countries may reduce output quotas at the group's meeting next week in Algeria.

OPEC President Chakib Khelil told the AP Saturday the group could announce a "severe" production cut and suggested the cartel may surprise the market in a bid to bolster prices.

OPEC, which controls about 40 percent of world crude supplies, has already slashed output by about 2 million barrels since September, but that has done little to halt plummeting crude prices.

"A decision by OPEC to cut output by at least 2 million (barrels a day) when it meets on Dec. 17 is apparently being discounted by traders, so it will likely require a larger cut in order to move prices," Addison Armstrong, director of market research at Tradition Energy, said in a note Tuesday.

On a positive note for U.S. consumers, the EIA also noted that residential heating oil prices for the current heating season (October-March) are projected to average $2.53 a gallon, a reduction of 24 percent from the year-ago period.

Residential propane prices are projected to average $2.10 this winter, a decrease of 14 percent from last winter, the EIA said.

Households using natural gas are expected to pay about the same as last year.

Meanwhile, the national average for regular gas fell nearly 2 cents overnight to $1.698 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. That's 56 cents a gallon below what it was a month ago and $2.41 below where it was in July when prices peaked at $4.11 per gallon.

In other Nymex trading, gasoline futures slipped less than penny to 95.5 cents gallon. Heating oil fell 1.55 cents to $1.47 a gallon while natural gas for January delivery rose 4.7 cents to fetch $5.613 per 1,000 cubic feet.

In London, January Brent crude dipped $1 to $42.42 on the ICE Futures exchange.