Oil dips below $59

Oil dips below $59
Investors look past China's stimulus plan as economic concerns and waning demand dominate.
By Ben Rooney, CNNMoney.com staff writer
Last Updated: November 11, 2008: 12:05 PM ET

NEW YORK (CNNMoney.com) -- The price for a barrel of crude oil fell below the psychologically important $60 level Tuesday morning as investors looked past China's massive economic stimulus plan to focus on weak global demand and a stronger dollar.

Light, sweet crude for December delivery was down $3.51 at $58.90 a barrel in New York. On Monday, oil rose $1.37 to settle at $62.41 a barrel.

The price of oil has fallen about 60% from July's all-time high above $147 a barrel on fears that global economic weakness will continue to undermine demand for gasoline and other petroleum products.

Demand concerns were briefly tempered Tuesday after the Chinese government announced a $586 billion plan to boost economic activity in one of the world's key consumers of oil. But investors now appear less optimistic about the plan, which will take time to implement, as the outlook for global economic growth remains cloudy.

"Yesterday's trade rebounded sharply higher at the open based on the Chinese stimulus package," said Tom Pawlicki, oil industry analyst at MF Global in Chicago. "In our opinion, however, the rally was too enthusiastic for the news."

Pawlicki points out that the package will provide "only" $14.6 billion in the current quarter, with the remaining amount disbursed over the next two years. He added that the plan's spending on housing and infrastructure may not provide the desired economic effect.

"The problem is that there is already a housing glut in China, and the infrastructure will likely rebuild the earthquake devastated area in Sichuan rather than create much new expansion," Pawlicki said.

Global markets: The oil market is also being pressured by falling stock prices worldwide.

Stocks in the United States were lower on recession fears. The Dow Jones industrial average was down about 3% roughly two hours into the session.

Major indexes in Europe were all lower in morning trading. Britain's FTSE 100 was down 3.2%, and France's CAC-40 was 4.5% lower. The DAX in Germany was down 5.2% as well.

The declines in Europe followed a slump in Asia, where Japan's benchmark Nikkei index dropped 3%. In Seoul, the KOSPI fell about 2%, while Hong Kong's Hang Seng index shed 4.8%.

Oil traders have closely tracked world stock markets to assess the severity of what many economists say is a looming global recession. As a result, oil prices often fall when stock prices retreat.

Dollar: The price of oil was also pushed lower by a stronger U.S. dollar, which rallied on the back of the global stock selloff.

The dollar rose 1.5% against the euro to $1.2562 in New York. Against the British pound, the greenback was up 1.2% at $1.5426.

Investors often buy oil and other commodities to hedge against a weaker dollar and sell those assets when the dollar rises. And a more robust buck makes oil, which is priced in dollars, less attractive to overseas buyers.

A grim outlook: Markets in the United States have been under pressure as rising unemployment, anemic consumer spending and weak corporate results threaten to tip the nation into a deep recession.

Last week, the U.S. Labor Department reported that the economy has lost 1.2 million jobs so far this year. As the job market deteriorates, many American households have cut back on spending.

Auto sales fell to a 25-year low in October as tight credit conditions and the weak economy kept consumers out of showrooms. At the same time, retail sales declined a larger-than-expected 0.7% in October, prompting concerns about the all-important holiday gift-buying period.

This reluctance to spend has a ripple effect on the broader economy, since consumer spending makes up more than 70% of U.S. gross domestic product.

In the third quarter, GDP declined at an annual rate of 0.3%, according to estimates released by the Bureau of Economic Analysis. That came after an increase of 2.8% in second-quarter GDP.

Many economists are predicting GDP will shrink again in the fourth quarter. Two consecutive quarters of declining GDP is one of the classic definitions of a recession.

Gasoline: Retail gas prices fell for the 55th day in a row.

The national average price for a gallon of regular gasoline came down another 2 cents overnight to $2.220, according to a daily survey by the American Automobile Association.

Tuesday's national average is down 46%, or $1.89, from the record high price of $4.114 that AAA reported on July 17. To top of page
First Published: November 11, 2008: 8:39 AM ET