Oil falls drops below $40 on dismal jobs report

NEW YORK -- Oil prices dropped below $40 Friday as the government reported U.S. employers slashed more than a half million jobs last month, the most in 35 years.

Light, sweet crude for March delivery fell $1.61 cents to $39.56 a barrel on the New York Mercantile Exchange.

The Labor Department reported 598,000 jobs were lost in January. The unemployment rate rose to 7.6 percent, the highest since 1992.

Oil traders see layoffs as an instant drag on oil demand. People have less need for gasoline when they no longer have a daily commute. They also cut their spending for toys, nonstick pans, raincoats and millions of other products that are made with petroleum.

"The economy's ugly. We know it's ugly," analyst and trader Stephen Schork said. For a sustained rebound in oil prices, "you have to stop seeing the economy contract. You have to stop seeing people get laid off. We probably won't see much of that this year."

The number of people remaining on the unemployment compensation rolls increased slightly to nearly 4.8 million, the most since records began in 1967.

Amid the gloom, some companies are performing above analysts' beaten-down expectations. Wal-Mart's sales beat Wall Street's forecasts and Macy's department store, which this week said it would slash 7,000 jobs, raised its fourth-quarter and full-year forecasts.

Investors are also watching for possible further production cuts by the Organization of Petroleum Exporting Countries, which has already promised to reduce output by 4.2 million barrels since September.

OPEC leaders have said they may reduce supplies again at the group's next meeting in March.

"I think they'll try to talk the market up rather than actually cut again," said Gerard Rigby, an energy analyst with Fuel First Consulting in Sydney. "They still need to sell their oil to get revenue."

Oil prices won't likely fall much below $40 a barrel and should trade in the $50s by the end of the year, Rigby said.

"In second half, the economy should be turning around, and once we see that, commodities should start to improve," Rigby said.

In other Nymex trading, gasoline futures fell 3.14 cents to $1.2434 a gallon. Heating oil dropped 3.82 cents to $1.3290 a gallon, while natural gas for March delivery lost 0.5 cent at $4.637 per 1,000 cubic feet.

In London, the March Brent contract gave up $1.21 at $45.25 on the ICE Futures exchange.