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Oil slips on weak global demand

VIENNA, Austria — Worries about global economic growth and expectations of a weak U.S. jobs report pushed oil prices lower Friday, despite concern about fighting in Gaza and evidence that OPEC production cutbacks were taking hold.

Oil prices had risen earlier this week to above $48 from a five-year low of $33.87 a barrel on Dec. 19 as investors worried the conflict in Gaza could engulf the oil-rich Middle East and affect supplies.

But prices then dropped sharply on new evidence of weak demand for crude, with U.S. jobless claims rising Thursday and the key payrolls report expected later Friday. Analysts forecast it to show a massive 600,000 jobs were lost in December.

Light, sweet crude for February delivery was down 38 cents at $41.32 barrel by midday in Europe in electronic trading on the New York Mercantile Exchange. The contract overnight fell 93 cents to settle at $41.70.

Lebanese militants fired at least three rockets into northern Israel on Thursday, threatening to open a new front for the Jewish state as it pushed forward with an offensive against Hamas in the Gaza Strip that has killed about 700 people. Israel responded with mortar shells.

"Some traders may be nervous fighting could spread," said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore. "Iran has been racheting up the rhetoric."

Top Iranian leader Ayatollah Ali Khamenei said Thursday his country would not spare any effort to assist Hamas, though he banned hardline student groups from carrying out suicide bombings in Israel.

An Iranian Revolutionary Guard commander earlier this week called on Islamic countries to use oil as a weapon to end the fighting in Gaza.

Oil prices fell the previous two trading sessions on expectations a severe global economic slowdown will undermine crude demand and evidence that an increasing number of OPEC members were cutting back on production.

Focusing on OPEC, oil and energy consultants KBC Market Services said it appeared "OPEC is now doing enough on supply to compensate for the fall in global oil demand."

"However, the market may not be convinced of sufficient compliance until OPEC production data for January become available early next month."

Part of the subdued market mood appeared to stem from dire economic warnings from U.S. President-elect Barack Obama.

On Thursday, Obama said the recession in the U.S. could "linger for years" unless Congress approves a spending package and tax cuts that will cost as much as $1 trillion.

Dismal employment news and weak reports from retailers also heightened fears that consumer demand will continue to weaken.

The Labor Department said 4.61 million Americans continued to seek jobless benefits in November, up 101,000. That exceeded analysts' expectations of 4.5 million and was the highest level since November 1982.

The payrolls data due later Friday will be watched closely, with many analysts expecting it to show unemployment swelled to around 7 percent in December from 6.7 percent in November.

Corporate news was not any better, after Wal-Mart, the largest retailer in the U.S., slashed its fourth-quarter earnings forecast and reported sales below analyst expectations. Department store operator Macy's Inc. said it will close 11 stores in nine states — affecting 960 employees — and also lowered its forecast for the fourth quarter.

"Demand is bad — that's the underlying reality," Chu said. "Unless there's a major shock, the market will likely drift back down below $40."

In other Nymex trading, gasoline futures slipped by less than a penny to fetch $1.08 a gallon. Heating oil fell more than a cent, selling at $1.50 a gallon while natural gas for February delivery lost close to 3 cents at $5.56 per 1,000 cubic feet.

In London, February Brent crude fell 36 cents to $44.31 a barrel on the ICE Futures exchange.

Associated Press writer Alex Kennedy contributed to this report from Singapore.

Dorothy Cox of The Trucker staff can be reached for comment at [email protected].