Oil prices tumble; gas falls to 2004 levels

COLUMBUS, Ohio- Oil prices fell nearly 7 percent Tuesday and gasoline prices fell to levels not seen since 2004 as a raft of lousy news about the economy, housing and the consumer state of mind suggested the U.S. is headed toward the worst recession in decades.

The government reported that the nation's gross domestic product in the United States shrank 0.5 percent in the third quarter, which was worse than expected. It was the worst showing since the economy contracted 1.4 percent in the third quarter of 2001, during the last recession.

Consumers and businesses have pulled back on energy spending, with massive layoffs and cost-cutting across almost every sector. That means less money will go toward powering everything from industrial plants to automobiles.

The Paris-based Organization for Economic Cooperation and Development said Tuesday that economic output next year would likely shrink by 0.4 percent for the 30 market democracies that make up its membership, against the 1.4 percent growth prediction for 2008. That would be the worst global recession since the early 1980s.

After spiking Monday on news that the U.S. would bail out financial giant Citigroup, light, sweet crude for January delivery on Tuesday tumbled $3.73 to settle at $50.77 a barrel on the New York Mercantile Exchange.

In London, January Brent crude fell 6 percent, or $3.57 to settle at $50.35 a barrel on the ICE Futures exchange.

The New York-based Conference Board reported that while consumer confidence in the U.S. rose in November as gas prices fell, Americans' views on the economy remain the gloomiest in decades amid widespread job losses, slumping home prices and dwindling retirement funds.

Gasoline prices nationwide continued to decline, falling 2.3 cents overnight to $1.885, their lowest levels since September 2004 when the average price for three days was $1.886, according to auto club AAA, the Oil Price Information Service and Wright Express. The current price is $1.20 below where it was a year ago and down $2.225 from the peak in July when prices hit $4.11 per gallon.

Meanwhile, a widely watched index showed home prices dropping by the sharpest annual rate on record in the third quarter as foreclosures continued to hammer prices and the tumult on Wall Street kept more homebuyers out of the market.

The Standard & Poor's/Case-Shiller U.S. National Home Price Index tumbled a record 16.6 percent during the quarter from the same period a year ago. Prices are at levels not seen since the first quarter of 2004.

Unlike on Monday, when news of Citigroup's rescue seemed to support oil prices, the announcement that the Federal Reserve would buy up to $600 billion in mortgage-back assets provided little optimism at Nymex.

"This independent weakness is indicative of market yet to achieve a bottom," said Jim Ritterbusch, president of Ritterbusch and Associates.

Ritterbusch said he expects Wednesday's weekly government inventory report of oil supplies could indicate even more of a pullback.

Oil analyst Stephen Schork downplayed claims that the Citigroup bailout led to Monday's rally in oil markets.

"Perhaps it is, assuming all of that Fed money that is now carpeting Wall Street actually begins to free up credit so traders can get back to trading," he said in a note Tuesday. "Otherwise, yesterday's pre-holiday short-covering rally was just that."

Even though gasoline consumption remains below year-ago levels, there are signs that the weakness is beginning to ebb, according to the weekly SpendingPulse report by MasterCard.

The report's four-week moving average shows weekly gasoline sales of 63.3 million gallons were down 3 percent from a year ago, the smallest year-over-year decline since the first week of July, according to the report. The year-ago numbers included the week of Thanksgiving.

"It looks like consumers are moving back toward more normal driving patterns," said Michael McNamara, vice president of MasterCard SpendingPulse.

Investors are eyeing the Organization of Petroleum Exporting Countries, which accounts for 40 percent of global supply, for signs the group may reduce output quotas at an informal meeting Saturday in Cairo.

Venezuelan Oil Minister Rafael Ramirez said Sunday that OPEC should cut oil production by 1 million barrels per day at the Cairo meeting. OPEC President Chakib Khelil said Monday that if the organization met today, a cut of 1 million barrels would not be enough to support oil prices. But Khelil has said in the past that OPEC needs more time to evaluate the effect of previous production cuts.

The group, which cut output by 1.5 million barrels a day last month, will hold its next official meeting on Dec. 17.

In other Nymex trading, gasoline futures dropped 4.76 cents to settle at $1.0949 a gallon. Heating oil slid 8.56 cents to settle at $1.6988 a gallon while natural gas for January delivery tumbled 44.1 cents to settle at $6.386 per 1,000 cubic feet.