Decline in Oil Prices Affects Iran’s Economy
December 4, 2008 A decline in gasoline use in the U.S., coupled with the economic downturn, is bringing in less revenue to oil-exporting countries like Iran and Venezuela. OPEC countries want to cut production in the midst of what some say is a free-fall in oil prices.
Light, sweet crude for January delivery fell 17 cents to settle at $46.79 a barrel on the New York Mercantile Exchange. Crude dipped to $46.26, the lowest level since May 20, 2005, when it traded at $46.20.
There are growing signs that crude, which has fallen $100 per barrel since mid-July, is rattling oil producing nations.
In Iran, state media reported Wednesday that President Mahmoud Ahmadinejad has acknowledged publicly for the first time that tumbling oil prices are gouging the country's fragile economy and will force his government into spending cuts.
The economic spillover in Iran began in the U.S., where Americans have drastically cut back on miles driven. Gasoline prices have plummeted to three-year lows.
"It's going to be a slow arduous process and we will see oil bottom well ahead of the end of the recession," said Jim Ritterbusch, president of energy consultants Ritterbusch and Associates. "But where and when that happens is still up for grabs."
The U.S. economy has been in a recession since for about a year, making the current downturn the longest in a quarter century, according to a panel of economists with the National Bureau of Economic Research.
Markets waiting the release later this week of U.S. unemployment figures may have had an indicator of what's to come Wednesday.
Non-farm private employment decreased 250,000 from October to November 2008 on a seasonally adjusted basis, according to the ADP National Employment Report.
Also on Wednesday, the U.S. Labor Department reported that worker productivity slowed in the summer while wage pressures increased, but both developments were not as bad as feared.
U.S. crude inventories had been rising as consumers and businesses cut back on fuel spending, but a Department of Energy report Wednesday helped support crude prices.
For the week ended Nov. 28 crude inventories fell by 400,000 barrels, or 0.1 percent, to 320.4 million barrels, which is 6.7 percent above year-ago levels, the Energy Department's Energy Information Administration said in its weekly report.
Analysts had expected a boost of 2 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.
Ritterbusch said any positive domestic supply news continues to be overshadowed by broader based economic issues on the demand side that aren't showing any side of turning around.
"These numbers came in a little more bullish than most people had expected, but they're certainly not capable of placing a bottom in this market," he said.
In London, January Brent crude fell 9 cents to $45.35 after settling near a four-year low on Tuesday.
Oil trader and analyst Stephen Schork said in his daily publication, The Schork Report, that the trend is still bearish and "just because we are nearly as close to $40 as we are to $50, does not, in and of itself, mean we are near some theoretical 'bottom.'"
Investors have also been discouraged by growing evidence that China's economy, the world's fourth largest, may slow more than previously expected. Property prices in China have plunged, leading analysts to expect a drop in construction, an important driver of Chinese growth.
The World Bank last week cut its 2009 Chinese growth forecast to 7.5 percent, the slowest in almost two decades.
The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply has cut about 2 million barrels of oil production per day since September.
That has failed to halt the slide in prices, and now the cartel is asking non-OPEC producers for help.
OPEC President Chakib Khelil said Tuesday oil producers such as Russia, Norway and Mexico should "express their solidarity" with OPEC and reduce output.
Not all analysts are convinced that cooperation from non-OPEC nation would help.
"If Russia cuts production, it gives a bearish signal because it shows Russia is clearly concerned about short-term weak demand," Pervan said. "Russia only reacts under major duress."
Ritterbusch said he views an upcoming OPEC meeting in Algeria as a "non-event."
"Supply-side developments such as an OPEC cut aren't going to turn this market around," he said. "We've been driven lower now for almost five months by bad demand side news, so it's going to take favorable demand side news to turn us around."
OPEC's problems have provided a silver lining to some.
The national average for regular gas fell again overnight, just under a penny, to $1.803 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. That is more than 60 cents gallon below what it was a month ago and more than $2.30 below where it was in July when prices peaked at $4.11 per gallon.
Ritterbusch said it will take evidence that falling gas prices are prompting people to drive more or a cold winter to absorb some excess on-hand distillate or heating oil supply to turn the oil markets around.
In other Nymex trading, gasoline futures fell less than a penny to $1.0536 a gallon. Heating oil rose 1.89 cents to $1.6021 a gallon while natural gas for January delivery fell less than a penny to $6.415 per 1,000 cubic feet.
Associated Press writer Alex Kennedy in Singapore, Pablo Gorondi in Budapest, Hungary, and Nasser Karim in Tehran, Iran, contributed to this report.
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