Oil settles below $50 amid gloomy economic news

NEW YORK -- Oil prices were flat Wednesday as reports showing a drop in industrial production and a massive crude surplus did little to affect investors' already gloomy outlook on the economy.

Benchmark crude for May delivery dropped 16 cents to settle at $49.25 a barrel on the New York Mercantile Exchange. In London, Brent prices lost 17 cents to settle at $51.75 a barrel on the ICE Futures exchange.

Traders, who've watched oil inventories grow for months, are increasingly swayed by equities markets to get a read on future demand, analysts said. Crude prices followed Wall Street as equities markets rose and then fell on Wednesday.

"Yes, we're swimming in oil," said Phil Flynn, an analyst at Alaron Trading Corp. "But the market isn't shaken by these big supplies anymore. We've had them for a while."

The Energy Information Administration said crude oil inventories rose by 5.6 million barrels last week as demand for gasoline and other fuels continued to slide. That was more than twice what analysts expected, and the total of 366.7 million barrels now in storage is the most held since Sept. 7, 1990, according to the EIA.

Meanwhile, the Federal Reserve reported a slowdown in activity at U.S. factories and mines. Total industrial capacity utilization rate fell to 69.3 percent from 70.3 percent, the lowest on records dating to 1967.

Global demand continues to slide as well. The Organization of the Petroleum Exporting Countries on Wednesday dropped its forecast for 2009 crude demand by 430,000 barrels a day. While Asia will continue to use more, the rest of the world will less of an appetite for crude this year, OPEC said.

OPEC now expects the world to consume 84.2 million barrels a day. Demand will shrink by 1.6 percent in 2009, or 1.37 million barrels a day, compared with last year.

OPEC's forecast follows a similar U.S. government forecast that said global oil demand will fall in 2009 to 84.1 million barrels a day.

Earlier this year, reports like these would have sent oil prices in a tailspin. But a lot of traders now expect the economy to pick up later this year, and they're investing with that in mind, analysts said.

"The market has been trading a lot on hope and not on reality," said Andrew Lebow, senior vice president and broker at MF Global.

Oil producers have cut back on their operations, pulling less crude from the ground as countries use less. OPEC members have been working on a production cut of 4.2 million barrels a day.

In the U.S., crude production is expected to rise this year by 440,000 barrels as two new oil platforms come online in the Gulf of Mexico, according to the EIA. But the American Petroleum Institute said Wednesday that the industry has cut back on new drilling.

API said U.S. oil and natural gas drilling fell in the first quarter for the first time in seven years. It estimated that 11,071 oil wells, natural gas wells and dry holes were completed in the first quarter of 2009, a 22 percent drop from the first quarter of 2008.

"The lower U.S. drilling activity indicates that the exploration and production sector is not immune to the current economic downturn," API statistics director Hazem Arafa said in a statement.

In other Nymex trading, gasoline for May delivery fell less than a penny to settle at $1.4509 a gallon. Heating oil for May delivery was unchanged, settling at $1.401 per gallon. Natural gas for May delivery lost less than a penny to settle at $3.681 per 1,000 cubic feet.