Oil prices fall below $40 a barrel for first time since 2009

Oil prices dipped below $40 a barrel Friday for the first time in 6 ½ years on the prospect of falling global demand, busting through a key threshold that could signal further declines and market turmoil.

The price of West Texas Intermediate for October delivery dropped as low as $39.86 a barrel, the first time it was under $40 since March 2009. Crude rallied to close at $40.45, but it was still down 87 cents on the day. And some analysts say the drop below $40 likely portends an additional slide into the $30's and continued weakness in the short term.

"It's a very important psychological level,“ says Phil Flynn, senior energy analyst with the Price Futures Group.  “It really signals that the global economy is in trouble.”

U.S. crude prices have now fallen for eight straight weeks, the longest such stretch since 1986.

Fueling Friday’s drop was a report that manufacturing activity in China recently tumbled to the lowest level in more than six years. That underscored that the recent fall in Chinese stocks and the government’s currency devaluation reflect fundamental weakness in the world’s second-largest economy.

Global supplies, meanwhile, are abundant, with production from both the U.S. and the Organization of Petroleum Exporting Countries at or near record levels. Saudi Arabia has said it would not scale back output to prop up prices.

Further pushing down prices was a government report that U.S. oil inventories unexpectedly rose last week. And the start of a refinery maintenance season slated to run through October is throwing more crude onto the market, says Tom Kloza, chief global analyst for the Oil Price Information Service.

But both Flynn and Kloza say the bear oil market is likely to be short-lived. Flynn expects the Chinese government to pump more monetary stimulus into the economy to fuel demand.

And a report Thursday from research firm Genscape says US drilling cutbacks this year have reduced production by far more than government figures show. Flynn says that should help nudge up prices in coming months.

Meanwhile, the end of refinery maintenance in November will likely coincide with the beginning of the winter fuel season, further supporting crude prices, Kloza says. He predicts oil could hover in the $30-$40 range for a couple of months before rising toward $50 by the end of the year.

In an unusual development, gasoline prices could be headed in the opposite direction. A strong summer driving season has kept gas prices relatively high, but softer demand this fall and the fall ramp-up of refineries is likely to push down regular unleaded to about $2 a gallon coming months, Kloza says.

By Paul Davidson

Source: USA Today