Oil echoes US growth concerns

Slips below $90-mark in New York on Fed remarks that the economy will slow

Crude oil fell in New York on concerns the US Federal Reserve's 25 basis point interest rate cut on Tuesday may not help to stem economic slowdown in the world's largest energy consumer.

Oil dropped 0.8 per cent after the Fed said the US economy is slowing and its financial markets have deteriorated. US share prices slumped the most in a month as some economists said the Fed's action fell short of what's needed to spur lending and avert a recession.

"The focus has turned to the economy," said Tetsu Emori, a fund manager at Astmax Futures in Tokyo. "The question is whether the economy can avoid a recession."

Crude oil for January delivery fell as much as 72 cents, or 0.8 per cent, to $89.30 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $89.37 at 12:41 pm in Singapore.

On Tuesday, the contract rose $2.16, or 2.5 per cent, to $90.02, erasing losses the previous two days. Prices gained after the US Energy Department raised its forecast for 2008 citing a 1.6 per cent rise in demand and after Magellan Midstream Partners, Enbridge and Teppco Partners shut pipelines because of power cuts.

Brent crude oil for January settlement traded at $89.43 a barrel at 11:41 am Singapore time after falling 56 cents, or 0.6 per cent, to $89.43 a barrel on the London-based ICE Futures Europe exchange.

"I don't know how sustainable prices are above $90," said Tom Hartmann, commodity broker at Altavest Worldwide Trading in Mission Viejo, California. "The upside is probably somewhat limited if you look at what's happening in the economy."

The S&P 500 dropped 2.5 per cent on Tuesday anticipating the Fed's quarter-point cut won't be enough to prevent the recession being forecast by some economists.

Prior to the central bank's announcement, futures trading showed 36 per cent odds of a half-point reduction to 4 per cent.

"The R-word is probably at the back of people's minds," Altavest's Hartmann said. A US inventory report due on Wednesday may have been enough to stop some investors "liquidating positions," slowing oil's decline, he said.

US economic growth would slow to 1 percent in the fourth quarter as consumer spending cools and the housing slump enters its third year, a survey showed. Japan's economy, the world's second-largest, is headed for a "mild recession" that could be worsened should a bigger-than-expected US slowdown halt the nation's export-led expansion, Morgan Stanley said.

"It's time to buckle up," Takehiro Sato, chief Japan economist at the investment bank, said in a report on Tuesday. Sato cut next year's growth estimate for Japan in half, saying "errant" government policy has hurt consumers and the building industry at home, and credit problems stemming from the sub-prime mortgage crisis will stifle demand from abroad.

Magellan Midstream Partners, which runs pipelines and fuel terminals in the central US, said it regained power at its crude oil line in Cushing, Oklahoma, that carries 115,000 barrels a day to Kansas.

Other pipeline and fuel-terminal operators began restoring power to units late on Tuesday in Oklahoma after an ice storm cut power and paralysed at least 800,000 barrels of crude-oil and refined-product shipments.

US crude-oil stockpiles probably fell 750,000 barrels from 305.2 million barrels last week, based on the median estimate from a Bloomberg News survey of 15 analysts.

Gasoline inventories probably rose for a fifth week, gaining 1 million barrels, while distillate supplies rose a second week, increasing by 500,000 barrels, based on the survey.

Oil prices fell a week ago when the department's report showed an unexpectedly large jump in fuel stockpiles as demand eased and refining rates held at a 10-week high.