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Oil Prices Drop on Fears of Recession
Tuesday January 22, 3:29 pm ET
By John Wilen, AP Business Writer
Oil Prices Drop on Fears of a Recession, but Recover Some on Fed's Rate Cut
NEW YORK (AP) -- Oil futures fell Tuesday on mounting concerns that the U.S. economy may
be heading toward a recession that would dampen demand for crude.
While the Federal Reserve's interest rate cut helped crude futures recover from much steeper
earlier losses, many investors doubt the move will stave off a serious slowdown.
"Whenever you see a rate cut of that magnitude between (Fed) meetings ... it conjures up
images of desperation," said Jim Ritterbusch, president of Ritterbusch and Associates in
Light, sweet crude for February delivery fell 72 cents to settle at $89.85 a barrel on the New
York Mercantile Exchange; earlier, prices had fallen as low as $86.11. Oil last traded that low
on Dec. 6. The February contract expired at the close of trading. March crude fell 71 cents to
settle at $89.21 a barrel.
The Fed cut the federal funds rate -- the interest that banks charge each other on overnight
loans -- by three-quarters of a percentage point to 3.5 percent. It was the biggest single cut of
its kind in recent memory.
The Fed was responding to concerns about a possible recession that have sent global equities
markets sharply lower in recent days.
The Nymex and other financial markets in the U.S. were closed Monday for the Martin Luther
King Jr. holiday. On Tuesday, the Dow Industrials fell sharply, though they might have fallen
further had the Fed not acted. Oil futures recovered from earlier losses because the Fed move
appeared to stabilize stocks, analysts said.
"I think the oil market is now attached to the hip of the equity markets," Ritterbusch said.
Indeed, energy investors often view stocks as a proxy for economic growth, and slower
economic growth could certainly cut demand for oil and petroleum products such as gasoline
and heating oil.
"We have long argued that a marked deterioration in the U.S. economy -- or a perception of
one -- was the 'Achilles heel' that could badly puncture the bull move in the commodity
markets," said Edward Meir, an analyst at MF Global UK Ltd., in a research note.
High energy prices also have been cited as a force pushing the economy toward recession. If oil
prices continue to fall, as many analysts now expect, that could relieve some pressure on the
economy. At the pump, gas prices have mostly fallen in recent weeks after rising sharply
earlier in the month as oil set a new record above $100 a barrel.
Overnight, the average national price of a gallon of gas held steady at $3.01 a gallon, according
to AAA and the Oil Price Information Service. But prices have fallen 2.3 cents a gallon since
Other energy futures mostly fell Tuesday. February heating oil futures dropped 3.48 cents to
settle at $2.4726 a gallon on the Nymex, while February gasoline futures fell 2.28 cents to settle
at $2.2806 a gallon. February natural gas futures dropped 32.3 cents to settle at $7.67 per 1,000
In London, Brent crude futures for March delivery, which fell on Monday, rose 94 cents
Tuesday to settle at $88.45 a barrel on the ICE Futures exchange.
Associated Press writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed
to this report.
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