Oil prices plunged below US$56 a barrel

Oil prices plunged below US$56 a barrel yesterday as awful numbers from retailers and a dismal outlook from automakers lent yet more evidence that the US and the rest of the globe will slash its energy use.

The Energy Department said it expects US consumption of petroleum to drop more severely than any time since 1980 next year, with gasoline use dropping by another 3 per cent. Its Energy Information Administration yesterday said 2009 petroleum consumption is projected to sink by a further 250,000 barrels per day, or 1.3 per cent, more twice that projected in its previous outlook.

Also yesterday, the International Energy Agency said more than a trillion dollars in annual investments to find new fossil fuels will be needed for the next two decades to avoid an energy crisis that could choke the global economy.

Light, sweet crude for December delivery fell nearly 6 per cent, or US$3.50 to settle at US$56.16 a barrel on the New York Mercantile Exchange, the lowest closing price since January 2007. Oil prices have plunged more than 60 per cent in four months from record highs near US$150 in July.

"We're seeing a massive readjustment on a historic scale," said Phil Flynn, an analyst at Alaron Trading Corp. "We've never gone through anything quite like this."

The Bank of England warned that it expects inflation to fall below its target of 2 per cent next year as the economy contracts, stoking expectations the Bank will slash interest rates again to ward off the risk of deflation.

On Wall Street, the Dow Jones industrials fell more than 400 points, and all the major indexes dropped more than 3 per cent as the market retreated for a third straight session.

Trader and analyst Stephen Schork said oil price fluctuations after the announcement of a massive stimulus package in China earlier this week signalled a nervous market.