Oil falls to $41.50 a barrel on demand worries

DENVER -- Another government report showing robust U.S. inventories added to a string of disheartening economic data Thursday sent crude futures lower for a second day.

Light, sweet crude for February delivery fell $1.13 to $41.50 a barrel on the New York Mercantile Exchange. On Wednesday, prices tumbled more than 12 percent in the largest single-day percentage decline since September 2001.

The sharp decline in spending on energy was outlined in a weekly report of natural gas storage levels last week, which fell less than expected.

Inventories held in underground storage in the lower 48 states fell by 47 billion cubic feet to about 2.83 trillion cubic feet, according to the Energy Information Administration.

Analysts had expected a drop of between 78 billion to 83 billion cubic feet, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

After the report, natural gas for February delivery fell 4 percent.

The report was released a day after EIA said inventories of commercial crude rose 6.7 million barrels, much higher than the 1.5 million-barrel build expected by analysts.

Crude has become so cheap, traders who are taking delivery have begun storing it at sea to sell at a later date.

"Demand is going to be lower than expected and we still have a lot of oil out there in tanks and storage," said Michael Lynch, president of Strategic Energy & Economic Research Inc. "Inventories are high in terms of barrels but when you think of the fact that demand is down they're very high."

On Thursday, president-elect Barack Obama said the recession could "linger for years" unless Congress pumps unprecedented sums from Washington into the economy.

Energy prices mirrored a drop on Wall Street as investors pulled back after seeing how many people continue to seek unemployment benefits and more bad news from retailers.

The Dow Jones industrials fell by 90 points.

The Labor Department said 4.61 million people continued to seek jobless benefits, up 101,000. That exceeded analysts' expectations of 4.5 million and was the highest level since November 1982, when the nation was emerging from a steep recession, though the labor force has grown by about half since then.

Equity markets across the globe fell as well.

The FTSE 100 index of leading British shares slipped 131.41 points, or 2.8 percent, at 4507.51, despite another half percentage point interest rate reduction from the Bank of England, which took the benchmark rate to an all-time low of 1.5 percent.

Germany's DAX fell 57.5 points to 4879.91.

Tokyo's Nikkei 225 stock average lost 362.82, or 3.9 percent, to 8,876.42. Hong Kong's Hang Seng Index fell 571.55 points, or 3.8 percent, to 14,415.91.

Those loses rolled into filings by retailers early Thursday showing a very weak sales.

Wal-Mart, the largest retailer in the U.S., slashed its fourth-quarter earnings forecast with sales less than analysts expected.

Department-store operator Macy's Inc. said it will close 11 stores in nine states -- affecting 960 employees -- and also lowered its forecast for the fourth quarter.

Even as crude prices drop, motorists are paying more for gasoline since the end of last year, a trend that is likely to continue through the summer, Oil Price Information Service analyst Tom Kloza said.

The retail price has risen from $1.61 a gallon on Dec. 30 to $1.76 a gallon as of Thursday, according to auto club AAA, the Oil Price Information Service and Wright Express.

Overnight, gas prices rose 3.5 cents.

A combination of factors has triggered the climb, including a jump in wholesale gasoline prices paid by retailers and passed on to consumers. The period from President's Day to Memorial Day typically brings higher prices.

"I do think prices will move higher in the spring and summer but nothing like the sort of 2007 and 2008 pricing apocalypses," Kloza said. "The economy is going to be a real, big wild card this year."

Oil prices had risen earlier this week to above $48 from a five-year low of $33.87 a barrel on Dec. 19 on investor concern that the conflict between Israel and Hamas in Gaza could spread to the rest of oil-rich Middle East and affect supplies.

Lebanese militants fired at least three rockets into Israel early Thursday, threatening to open a new front for the Jewish state as it pushed forward with a bloody offensive in the Gaza Strip that has killed nearly 700 people. Israel responded with mortar shells.

Adding some support to prices is the continued gas dispute between Ukraine and Russia, with all gas deliveries to Europe through Ukraine frozen for a second day. Both sides met earlier Thursday and were in Brussels to speak to the EU about how to resolve the impasse.

In other Nymex trading, gasoline futures fell almost a penny to $1.068 a gallon. Heating oil fell 3.48 cents to $1.508 a gallon, while natural gas for February delivery tumbled 26 cents to $5.612 per 1,000 cubic feet.

In London, February Brent crude fell $1.21 to $44.65 a barrel on the ICE Futures exchange.