Oil down nearly 8 percent, below $38 as demand weakens

NEW YORK Mon Jan 12, 2009 6:19pm EST

Gas splashes while a man fills petrol in a gas can at a filling station in Puchheim westward of Munich December 12, 2008. REUTERS/Michaela Rehle

Gas splashes while a man fills petrol in a gas can at a filling station in Puchheim westward of Munich December 12, 2008.

Credit: Reuters/Michaela Rehle

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NEW YORK (Reuters) - Oil settled down nearly 8 percent on Monday, dragged below $38 by the growing impact of the economic recession on global energy consumption.

Russia and Ukraine signed a deal to help secure the resumption of Russian gas supplies to Europe, cut off for nearly a week in freezing temperatures.

U.S. crude settled at $37.59, down $3.24, or 7.94 percent, a barrel, after reaching a low of $37.48 a barrel.

London Brent crude settled at $42.91, down $1.51.

"The macroeconomic factors and concern about demand remain in focus," said Phil Flynn, analyst at Alaron Trading in Chicago.

Slumping fuel demand due to the global recession sent oil prices down 54 percent last year, with crude now off more than $100 from a record peak above $147 a barrel in July.

U.S. stocks extended losses on Monday as Treasury Secretary Henry Paulson said the economy was mired in a very difficult period.

U.S. jobless data on Friday showed employers slashed 524,000 jobs in December, driving the unemployment rate to its highest level in almost 16 years.

SUPPLY CUTS

Prices dropped despite news that OPEC members may cut production further and that heating oil demand in top consumer the United States will climb above average this week due to cold weather.

"Look at what the market is ignoring, OPEC cuts and the Saudis' intent to cut more, the coldest weather this year; that's really indicative of the state of oil demand," Flynn said.

Iran's representative to the Organization of Petroleum Exporting Countries was quoted as saying the group could decide to reduce oil output again at its meeting in March, if crude prices fell further.

The world's biggest oil exporter, Saudi Arabia, already plans to cut production by an additional 300,000 barrels per day (bpd) in February to prop up the collapsing oil market, industry sources said on Sunday.

Riyadh has already lowered supply this month to 8 million bpd, meeting its target under OPEC's pact to reduce overall supplies by a record amount from January 1.

Saudi Arabia's cutbacks add to similar moves this month by other OPEC producers, including Iran, the United Arab Emirates, Kuwait and Libya, to curb supplies.

But evidence that oil producers are cutting output has not lent much support to prices so far and most oil analysts said they maintain a bearish outlook for prices in the short term.

Goldman Sachs Commodities said in a research note on Friday that a market surplus was expected to drive inventories higher and put pressure on its forecast oil price of $30 a barrel for the first quarter of 2009.

(Additional reporting by Christopher Johnson in London and Fayen Wong in Perth; Editing by Christian Wiessner)

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