Oil fell for a second day on Tuesday as the U.S. dollar held on to its recent rebound against the euro and traders weighed up the prospect of another increase in OPEC production.
U.S. light crude for December delivery fell 42 cents to $94.20 a barrel by 9:09 p.m. EDT, recovering from early lows after Saudi Oil Minister Ali al-Naimi said the producer group would not act on output at this week's heads of state summit in Riyadh.
London Brent crude was down 50 cents at $91.48.
U.S. oil has fallen about $4 from its record of $98.62 a barrel last Wednesday, weighed down by concerns of a slowing U.S. economy and signs that OPEC may finally take action.
Naimi said on Sunday that an output increase will be discussed at an upcoming meeting of the producer group. That would come on top of the 500,000 barrel per day (bpd) rise that the kingdom convinced OPEC to agree at a September meeting.
He told the Financial Times in an interview published on Tuesday that "there will be absolutely no discussion" of an output rise during this week's Riyadh summit, shifting the focus to OPEC's next official policy meeting on December 5 in Abu Dhabi.
"The market is very jittery at the moment and the decline has been driven by comments from OPEC," said Peter MacGuire, managing director of Commodity Warrants Australia in Sydney.
"The expiry of the December contracts could also put some downward pressure on prices later this week."
Analysts said the expiry of options on the December contracts on Tuesday could offer some support for oil prices, but prices could tumble soon after as speculators scramble to exit the main December contract ahead of its expiry on Friday.
A rebound in the U.S. dollar, which on Monday posted its biggest one-day gain versus the euro in over a year, also helped pull down crude oil futures. It held most of those gains in early Tuesday trade, but remained near an 18-month low versus the yen.
Traders will also be focusing on the weekly U.S. crude inventory data, which will be released a day later than normal on Thursday because of the federal Veterans Day holiday on Monday.
A preliminary Reuters poll showed that analysts were expecting a 1.0 million barrel drawdown on crude stocks, a 700,000 barrel decline in distillate inventories and a 400,000 barrel drop in gasoline supplies.
The OPEC summit will call on consuming nations to play their part in bringing down record oil prices that are increasingly influenced by financial markets, Algerian Energy and Mines Minister Chakib Khelil said on Monday.
Still, analysts said the state of emergency in Pakistan, Turkey's dispute with Kurdish rebels, and ongoing problems with militants in Nigeria could reverse oil's slide and push prices towards $100 a barrel again.
Troops repelled an armed attack on one of Nigeria's largest oil export terminals on Monday, industry sources and officials said.
Asian shares steady as firm yen weighs on Nikkei
Asian stocks steadied on Tuesday after suffering their biggest one-day percentage drop in three months, but a strong yen weighed on Japanese exporters, keeping the Nikkei under pressure.The yen hovered near an 18-month high against the dollar as concerns about credit-related losses at U.S. banks prompted investors to trim risky carry trades, in which they borrow low-yielding currencies to buy higher-yielding ones.
By the midday break, Tokyo's Nikkei average was down 0.2 percent despite solid economic growth figures as selling of shares in trading companies such as Mitsui & Co weighed. MSCI's measure of other Asia Pacific stocks gained 0.5 percent by 9:30 p.m. EST.
Resource stocks lost further steam on the back of a slide in commodities and oil prices.
"This is still a pretty nervous market," said David Halliday, associate director at Macquarie Equities.
"No one's really quite sure how far our market, or overseas markets, are going to fall before people get confidence again."
On Monday, the MSCI index slid nearly 4 percent, posting its steepest slide since the 5.7 percent tumble on August 16. The index has fallen more than 10 percent from the November 1 record high, the second double-digit pullback from a peak this year.
Investors sold Japanese exporters such as Canon Inc, fearing the yen would dent dollar profits at these firms.
Australia's biggest investment bank, Macquarie Group, dropped 3.4 percent after giving a cautious outlook.
FINANCIALS FIRM
Still, investors saw some value emerging in beaten-down financial stocks. Australia's Westpac Banking Corp and Commonwealth Bank both rose about 2 percent, while Japan's top lender Mitsubishi UFJ climbed 2.3 percent.
Japan's economy grew a better-than-expected 0.6 percent in the July-September quarter, spurring investors to pick up financial shares that had been battered in the recent sell-off.
"It was a pretty good figure overall. I had thought the July-September recovery would be led mostly by external demand, but domestic demand also fared well," said Naoki Iizuka, a senior economist at Mizuho Securities.
South Korea's KOSPI rose 0.2 percent, Hong Kong's Hang Seng Index was up 0.1 percent, Australia's S&P/ASX 200 index put on 0.9 percent and Taiwan's TAIEX rose 0.7 percent.
On Wall Street, stocks dropped for a fourth session led by technology shares. The Nasdaq Composite Index lost 1.7 percent while the blue-chip Dow edged down 0.4 percent.
RISK AVERSION
Japanese government bonds edged up, pushing the benchmark 10-year yield to a 21-month low as a shaky stock market reinforced doubts about how soon the Bank of Japan can raise interest rates.
The central bank ends a two-day policy meeting around midday and investors are awaiting comments from BOJ Governor Toshihiko Fukui for clues on the policy outlook.
The BOJ is widely seen holding rates at 0.5 percent for an 11th straight meeting on Tuesday, but market players believe Fukui will reiterate that the central bank will gradually lift rates despite the latest credit jitters hitting stock markets.
The 10-year yield dipped 1.5 basis points to 1.495 percent, the lowest since February 2006.
The yen stayed well bid on the continuing unwinding of risky trades, while the dollar held onto the most of its sharp gains versus the euro, sterling, and the Canadian and Australian dollars made the previous day as U.S. players reduced the level of risk they take elsewhere and repatriated funds.
The dollar edged up to 110.16 yen It fell as low as 109.12 yen on electronic trading platform EBS on Monday, the lowest since May 2006.
The euro firmed slightly against the dollar to $1.4570 staying well below a record high of $1.4753 hit on EBS on Friday.
Oil fell more than $1, extending the previous session's decline, weighed down by anticipation of a possible hike in crude production by OPEC, while spot gold also added to previous losses and hovered below $800 an ounce.
China's October Inflation Matches Decade High of 6.5%
Nov. 13 -- China's inflation accelerated in October as food prices jumped, adding pressure on the central bank to raise interest rates for a sixth time this year.
Consumer prices rose 6.5 percent from a year earlier, matching the decade high in August, the National Bureau of Statistics said today, after gaining 6.2 percent in September. That was more than the 6.3 percent median estimate of 20 economists surveyed by Bloomberg News.
Pork prices jumped 55 percent, adding to the surge in vegetable and cooking-oil costs that's spurred government subsidies for farmers and crackdowns on price-fixing this year to avoid social unrest. October's record $27 billion trade surplus pumped cash into the economy, stoking inflation that's twice the 3 percent pace the central bank targets.
``Food inflation has expanded into other categories -- energy, labor and asset prices,'' said Chris Leung, senior economist at DBS Bank Ltd. in Hong Kong. ``Everyone in China is feeling inflation, especially the poor.'' He expects another rate increase this year.
The yuan traded at 7.4237 versus the dollar at 11:30 a.m. in Shanghai after closing at 7.4123 yesterday. The CSI 300 Index of stocks climbed 1.7 percent after earlier rising as much as 2.1 percent.
Food prices account for a third of the consumer-price index.
Premier Wen
Premier Wen Jiabao yesterday visited poor people in Beijing's Dongcheng district, expressing concern at price rises and highlighting efforts to aid the pork, cooking oil and dairy industries, the government said.
A stampede at a supermarket sale of cooking oil killed three people on Nov. 10 in the central city of Chongqing, state media reported. Soaring consumer prices helped trigger the Tiananmen Square protests that were crushed by the army in 1989.
``Prices have been on the rise these days and I know that even a one-yuan increase in prices will affect people's lives,'' Wen said, according to a statement posted on the government's Web site. One yuan is about 13 U.S. cents.
In October, vegetable costs jumped 29.9 percent from a year earlier. Prices for edible oil surged 34 percent, while the cost of eggs rose 14.3 percent.
Price increases for non-food items in October from a year earlier were 1.1 percent, the same as in September.
Inflation Pressures
There's pressure for inflation to keep rising.
The government this month raised prices for gasoline, diesel and jet fuel as crude oil surged to records.
Producer prices jumped 3.2 percent in October from a year earlier after climbing 2.7 percent in September, the statistics bureau said yesterday. M2, the broadest measure of money supply, rose 18.47 percent in October from a year earlier.
``Money supply is growing very fast and that is worrying because it may push inflation higher,'' said Paul Cavey, an economist at Macquarie Securities Ltd. in Hong Kong.
Three days ago, the People's Bank of China ordered lenders to set aside 13.5 percent of their deposits from Nov. 26, the highest proportion since at least 1987. The central bank has pushed the benchmark one-year lending rate to a nine-year high of 7.29 percent.
For the first 10 months, consumer prices climbed 4.4 percent.
The central bank last week forecast full-year inflation of about 4.5 percent this year, up from 1.5 percent in 2007 because of expectations for prices to rise and pressure from food, energy and labor costs. Inflation of 3 percent is the central bank's annual target.
A sixth increase in interest rates is likely this year, according to a Bloomberg News survey of economists.
$100 Oil May Mean Recession as U.S. Economy Hits `Danger Zone'
Nov. 13 -- Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened U.S. economy into recession.
``We are in a danger zone,'' says Nariman Behravesh, chief economist at Global Insight Inc. and a former Federal Reserve economist. ``It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.''
Crude-oil prices are poised to cross the $100-a-barrel mark while the U.S. economy is still reeling from a surge in corporate borrowing costs. Europe and Japan are vulnerable as well, after the U.S. subprime-mortgage collapse contaminated their credit markets.
Even before the latest jump in energy costs, economists expected U.S. growth to slow to less than 2 percent in the fourth quarter -- half the third quarter's pace. Andrew Cates, an economist at UBS AG in London, said his models suggest a 45 percent chance of a U.S. recession next year, up from 33 percent last month, as oil prices prove a ``growing concern.''
Japan risks its fourth recession since the early 1990s, with its index of leading economic indicators falling to zero for the first time in a decade. The European Commission last week cut its 2008 growth forecast for the 13 nations that share the euro to 2.2 percent from 2.5 percent, partly because of costlier crude. The economy grew 2.8 percent last year.
Energy Efficiency
The world economy may still dodge recession as emerging markets continue to expand. A report last week by Deutsche Bank AG said gains in energy efficiency mean the effect of more expensive oil will ``remain muted.''
Even so, gloom is spreading at a speed that suggests ``we're walking a really fine line,'' says John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``Even a month ago, you probably wouldn't have thought we'd be seeing a sustained credit problem and oil holding up above $85 a barrel.''
Crude oil traded at a record $98.62 last week on the New York Mercantile Exchange and ended the week at $96.32, bringing its increase this year to 58 percent. Prices adjusted for inflation exceed the previous record, set in 1981 when Iran cut exports.
The dilemma for central banks is how to balance oil's drag on their economies against the risk of higher inflation. Fed Chairman Ben S. Bernanke told Congress Nov. 8 that oil prices threaten both ``renewed upward pressure'' on inflation and ``further restraint on growth.''
Accelerating Inflation
Such concerns prompted the European Central Bank to keep interest rates on hold last week, and President Jean-Claude Trichet said he still sees a danger that inflation will accelerate.
Clayton Jones, chief executive officer at Rockwell Collins Inc., says central bankers should err on the side of supporting growth. Jones, whose Cedar Rapids, Iowa-based company makes aircraft-cockpit instruments, said in an interview that he's ``much more worried about recessionary impacts rather than inflationary impacts.''
Manufacturers are among the first to feel the pinch: Rising energy prices are increasing their costs while drooping consumer and business confidence erodes demand.
In the U.S., the Institute for Supply Management's manufacturing index fell to a seven-month low in October as gauges of orders and production declined.
Lower Profits
Peoria, Illinois-based Caterpillar Inc., the world's biggest maker of bulldozers and excavators, cut its profit forecast on Oct. 19 and said the economy would be ``near to, or even in, recession'' in 2008.
The pain doesn't stop there. Rising jet-fuel prices are forcing airlines to curtail expansion plans. Chicago-based UAL Corp.'s United Airlines said it may cut capacity in 2008 to make up for higher fuel costs. Cologne-based Deutsche Lufthansa AG is raising fuel surcharges on long-haul flights.
Dallas-based Southwest Airlines Co. is ``reconsidering our growth rate for next year,'' because of ``very significant'' cost increases, Chief Executive Officer Gary Kelly said Nov. 7.
Meanwhile, U.S. shoppers, who helped propel most of the current expansion, may cut back as gasoline and home-heating costs rise. Retail-sales growth from November through January may be the slowest since 2002, consultant Ernst & Young estimates. Consumer spending accounts for more than two-thirds of the U.S. economy.
`A Huge, Real Shock'
Fuel costs are ``a huge, real shock'' to consumers, says Nouriel Roubini, chairman of Roubini Global Economics LLC and a professor at New York University. ``High oil prices are going to remain with us until we go into a recession.''
Europe's manufacturers are contending not only with increased energy costs but also the euro's rise to a record against the dollar, which is hobbling exports.
An index of manufacturing growth in Europe dropped to the lowest level in more than two years in October, and confidence among executives in Germany fell to a 20-month low.
Morgan Stanley's model of activity in the euro zone is now flashing the ``risk of manufacturing recession,'' according to Chief European Economist Eric Chaney, a former official at the French ministry of finance. He says the area's economy may run close to its ``stall speed'' of about 1 percent in the first quarter, and ``oil is not making things easier.''
Biggest Decline
Heidelberger Druckmaschinen AG, the world's largest maker of printing machines, last week reported its quarterly profit dropped by almost half, triggering the biggest decline in its shares since 2004. ``Energy and raw-material costs have made life difficult,'' says Dirk Kaliebe, chief financial officer of the Heidelberg, Germany-based company.
The pain extends to China and India as governments pare energy subsidies, putting more of the burden on companies and consumers. China increased fuel prices by as much as 10 percent Nov. 1, and India may follow as soon as this week.
``The stage is set for a significant slowdown in global manufacturing,'' says Joseph Lupton, a former Fed economist now at JPMorgan Chase & Co., which predicts industrial-production growth worldwide will decelerate by more than half before the end of this year, to about 3 percent.
The speed of the latest jump in oil prices tests the resilience of economies that weathered previous increases, says David Hale, president of Chicago-based Hale Advisors LLC.
``We've had stages in which the price has gone up over a period of two or three years,'' he told a Nov. 7 teleconference. ``The recent price spike from $85 to $96 has happened in just a few weeks, so this will pose more of a risk.''
The longer prices remain high, the greater the threat, says Neal Soss, chief economist at Credit Suisse Holdings Inc. in New York.
While Soss doesn't expect a recession, he compares the danger to ``driving on an icy road: You may get away with it for a while, but the risk of having an accident has gone up.''
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