Oil prices slip on market woes

Mirroring declines in stock markets worldwide, oil futures fell nearly $9 to dip below $78 a barrel Friday for the first time in 13 months, raising the prospect of $60 oil by year’s end.

The unrelenting declines in stock values combined with increasingly bleak economic news pushed oil down 17% for the week -- the commodity’s largest one-week drop since U.S. forces invaded Iraq in early 2003.

The cost of light, sweet crude for November delivery closed down $8.89, or 10%, at $77.70 a barrel on the New York Mercantile Exchange. Oil was last this cheap on Sept. 11, 2007, when it hit $76.92 a barrel.

Oil’s dramatic dive -- it’s down 47% from the record-high price above $147 in July -- should provide relief for consumers at the gas pump.

On Friday, the nationwide average cost of self-serve regular was $3.35 a gallon, down more than 5 cents overnight, and nearly 32 cents lower than a month ago, according to the American Automobile Assn.’s daily survey of fuel retailers. That’s still well above the year-earlier average of $2.76.

A portion of oil’s dizzying decline reflects investors’ flight from markets of all kinds. There’s also some backpedaling from investment banks including Morgan Stanley, which grew to become an influential player in energy markets during the multiyear bull run in oil, said Andrew Lipow, an oil industry consultant and former trader. The banks also are finding it harder to line up trading partners, market watchers said.

But the biggest factor was a sense that worldwide oil demand was cooling fast.

The latest report from the International Energy Agency reinforced that notion. The Paris-based energy watchdog for industrialized nations on Friday cut its demand forecasts for this year to 86.5 million barrels a day, down 240,000 barrels a day from the last projection and only 0.5% higher than 2007 demand. For 2009, the group cut demand projections to 87.2 million barrels a day, down 440,000 barrels a day.

“Expectations of the economy and its implication for oil consumption -- that’s really what’s causing it,” said James Williams, who publishes the Energy Economist newsletter from London, Ark. “That, together with the realization that oil was not in fact a safe haven.”

Williams believes the cost of oil could fall to the $60 level, even if the Organization of Petroleum Exporting Countries opts to cut production when its ministers meet Nov. 18. “Recessions trump OPEC cuts,” he said.

Lipow said he expected the national average to drop below $3 a gallon within a month. By the end of the year, the U.S. average price of gas could be around $2.80 a gallon -- which would roughly match the average from the week in 2007 when oil was last below $78 a barrel.

Not since March 2007 have oil futures sold below $60 a barrel. At that time, regular gasoline cost an average of $2.61 a gallon nationwide.

IEA officials cautioned that demand was still growing in emerging markets such as China, India and the Middle East, and that rising oil consumption in those areas could keep the global balance between supply and demand tight.

“No one can foresee the ferocity or duration of the current economic tempest, nor whether a full-blown recession will be avoided,” the IEA said. But, it added, “we have yet to see unambiguous evidence of a sharp slowdown from China, while Middle Eastern demand remains robust.”

In addition, the IEA said the worldwide credit crunch could all but eliminate capital-intensive oil production expansion projects as smaller oil companies and nations such as Russia and Brazil struggle with suddenly falling oil revenue.

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elizabeth.douglass@latimes.com