Oil drops near 6 percent on slumping demand

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(Agencies)
Updated: 2008-11-04 10:01

NEW YORK -- Oil fell nearly 6 percent on Monday as further indicators of falling demand linked to a potential recession offset OPEC plans to reign in output.

Workers deliver liquid petroleum gas (LPG) tanks to a retailer in Manila, November 3, 2008. [Agencies]

US crude settled down $3.90 at $63.91 a barrel, after October saw the steepest monthly price decline ever for oil as global demand slowed. London Brent crude dropped $4.84 to settle at $60.48 a barrel.

Oil hit a record $147.27 a barrel in mid-July but has since more than halved as poor economic data added to pressure from weak demand reports in the United States and other key consumer nations.

"The most devastating blow for crude oil today is data showing that US manufacturing activity in October fell to the lowest level in 26 years, which means more worries for oil demand," said Phil Flynn, an analyst at Alaron Trading, in Chicago.

"Manufacturing used to be a great forward indicator for oil demand, but if the manufacturing sector is down, it will be a struggle to keep oil demand up," he added.

US factory activity, a barometer for future oil demand, contracted sharply in October, falling to its lowest in 26 years as the financial crisis racked the world's largest economy.

The Institute for Supply Management said its index of national factory activity fell to 38.9 in October from 43.5 in September. A reading below 40 is exceptionally weak.

BP Chief Executive Tony Hayward estimated US demand has dropped 2 million barrels per day on the year over the last four weeks.

Corporate results and outlooks worsened on Monday, and automotive companies from Japan to Italy to Detroit said October sales were the weakest in about 20 years as economies continued to weaken and consumer credit, and available cash, dried up.

Ford Motor Co's US sales for October were down 30.2 percent on last year, with General Motors, Chrysler, Nissan and Volvo all reporting considerable slumps year on year.

OPEC Cut

The market has been awaiting signs Saudi Arabia has cut back crude production after the OPEC agreed in October to reduce output by 1.5 million barrels per day (bpd) to support tumbling prices.

Saudi Arabia has yet to inform its customers of any cuts in November oil supply, trade sources in Asia said.

OPEC President Chakib Khelil said on Sunday that cartel members must implement agreed output cuts and inform customers of the reductions if they want a stable oil price between $70-$90 a barrel.

United Arab Emirates Oil Minister Mohammed al-Hamli said the OPEC member has kept its pledge to cut oil supplies in line with commitments.

A Reuters survey showed OPEC oil supply fell in October for a second consecutive month as Saudi Arabia and Iran trimmed production and maintenance curbed supply in the United Arab Emirates.

A separate poll of analysts ahead of weekly US government inventory data forecast US crude oil stocks rose by 1.1 million barrels last week. The analysts predicted a 1.3-million-barrel build in distillate inventories and a 1-million-barrel drawdown in gasoline stocks.