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Oil tumbles below $40 for first time since 2004

Oil prices tumbled below $40 for the first time since the summer of 2004 Wednesday despite an announcement from OPEC of a record production cut of 2.2 million barrels a day.

Markets had already priced in a vastly reduced flow of oil and traders focused instead on troubling economic data that points to a long and severe recession.

Light, sweet crude for January delivery tumbled 8 percent, or $3.54, to settle at $40.06 on the New York Mercantile Exchange. Benchmark crude prices fell as low as $39.88, a price last seen in July 2004.

"There's just so much oil in inventory out there right now," said Michael Lynch, president of Strategic Energy & Economic Research. "Nobody wants to buy this stuff."

Crude prices have fallen so low, producers have leased supertankers to store the oil at sea, hoping that oil will rebound.

U.S. gasoline inventories continued to rise, the government reported, providing further evidence of a major pullback by American motorists.

Demand for gasoline over the four weeks ended Dec. 12 was 2.7 percent lower than a year earlier.

OPEC had already announced cuts totaling 2 million barrels earlier this year, also with little effect. The unprecedented production cuts and the market reaction show just how fast energy demand has fallen during the worst economic downturn in at least a generation.

"You've got a commodity that people are buying less of because they can't afford to buy more," said Phil Flynn, an analyst at Alaron Trading Corp. "People are fearful. They have a lack of confidence in the economy. They're closing their factories."

Grim economic news radiates out of the U.S., Europe and Asia almost daily as consumers and industries pull back on spending.

The Cooper Tire and Rubber Co. said Wednesday it will cut 1,300 jobs and close a plant in Georgia.

Newell Rubbermaid Inc. is reducing its salaried work force by as much as 10 percent. The Atlanta-based company slashed its fourth-quarter and full-year profit guidance Wednesday.

In Detroit, General Motors Corp. put the brakes on construction of an engine factory trying to hold on to the cash that it has left.

Meanwhile, the dollar suffered its biggest one-day decline against the euro after the Federal Reserve cut a key lending rate target to historic lows.

That would typically lead more investors into the crude market because oil is bought and sold in dollars and you can get more bang for the buck.

But investors in this harsh economic climate are holding onto their wallets like never before, betting there's not enough global demand to support higher crude prices, said Gene McGillian, an analyst at Tradition Energy.

"Oil prices should be a lot stronger," McGillian said.

The last time oil prices dipped below $40 a barrel was July 21, 2004. Prices settled that day at $40.09, according to Peter Beutel, an oil analyst at Cameron Hanover.

Many analysts believe oil prices will continue falling next year with agencies ranging from the U.S. Department of Energy to the International Energy Agency forecasting weak demand.

IHS Global Insight Chief Economist Nariman Behravesh was among the industry experts forecasting lower prices for oil.

"Oil prices will (easily) fall below $40 per barrel in the next year, and could tumble all the way to $30," Behravesh said in a research note. "With the economic outlook deteriorating by the day, futures markets for commodities have not priced in the full extent of the 'demand destruction' taking place."

Doubts also remain about the willingness of some OPEC members to adhere to price-boosting production quotas.

"OPEC has lacked credibility for a long time on discipline," said Gerard Rigby, energy analyst at Fuel First Consulting in Sydney. "OPEC is going to have to show they are committed to the cut, that it's not just talk."

U.S. crude inventories rose slightly last week despite expectations for a drop, while gasoline reserves increased as demand stayed below year-ago levels, according to government data released Wednesday.

Analysts had expected a drop of 900,000 barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Gas prices, because it must be refined from crude, almost always lags the movement in oil prices.

Retail gas prices, which hit a low of $1.656 a gallon on Friday, rose to $1.667 a gallon Wednesday, according to auto club AAA, the Oil Price Information Service and Wright Express.

In London, February Brent crude rose 97 cents to settle at $45.53 a barrel on the ICE Futures exchange.

In other Nymex trading, gasoline futures fell 3.45 cents to settle at $1.0055 a gallon. Heating oil fell 1.77 cents to $1.4425 a gallon while natural gas for January delivery fell 15.2 cents to settle at $5.619 per 1,000 cubic feet.