Oil falls

Economic worries outweighed factors that would normally boost the market -- Mideast tensions, signs that OPEC was implementing large-scale production cuts, the ongoing Gazprom-Ukraine gas dispute and a winter likely to feature the coldest weather in a decade.

"It's amazing what the market's ignoring," said Phil Flynn, an analyst at Alaron Trading Corp. "That really tells you the story of how bearish this is."

Light, sweet crude for February delivery fell 7 percent, or $2.91, to 37.92 a barrel on the New York Mercantile Exchange. The contract on Friday fell 87 cents to settle at $40.83.

"Clearly, the focus this morning is back on the macroeconomics, and the concern that the demand for oil is just not going to be there any time soon, and there's going to be plenty of oil out there," Flynn said.

Steel producer Alcoa, chip maker Intel and biotech company Genentech are expected to report fourth quarter results this week, giving investors a glimpse of how deep the current recession may be.

"Given that we're likely to see quite a few rather poor fourth quarter earnings reports, downward pressure will continue to be exerted on oil," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. "Worries about the macroeconomic outlook will continue to constrain oil."

Although still far away from their Dec. 19 closing of $33.87, oil prices fell 17 percent last week, weighed by fears that rising U.S. unemployment will undermine crude demand.
The Labor Department said Friday that employers slashed 524,000 jobs in December and 2.6 million jobs for all of 2008. The nation's unemployment rate jumped to 7.2 percent, the highest since 1993.

Still, those bearish factors were expected to keep further price erosion in check.
"We have these other factors that will support oil," Shum said. "Most likely, we won't see a big downward spiral despite the poor earnings reports."

Raymond James analyst Darren Horowitz said in an analyst note that while the recession is dominating short-term prices, geopolitical factors such as Saudi Arabia's weekend announcement that it would cut oil output by about 300 million barrels per day below its target may lend support in the long term.

Prices of futures contracts for later this year suggest investors expect oil to recover. The March contract trades near $46 a barrel while the April contract trades above $49.
"The expectation is that pricing will regain strength, and it's not a question of if but when," Shum said.

The contract price spread is creating an enormous incentive to build inventory, said oil trader and analyst Stephen Schork.
"Little wonder then why overall crude oil supplies have since jumped to a 35-week high," Schork wrote in his daily publication, The Schork Report.

There are signs that the Russia-Ukraine gas dispute could be nearing an end.
Gazprom, Russia's gas company, said that Ukraine signed a deal Monday to allow independent monitors to track natural gas supplies from Russia to Europe with no additional conditions. The agreement could open the way for a resumption of gas shipments to Europe through pipelines that cross Ukraine.