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Sat 6 Dec 2008 09:00 AM

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Oil on verge of breaching $40

Crude falls below $42 a barrel, its lowest since January 2005, following gloomy report on US job losses.

Oil fell below $42 a barrel on Friday, its lowest since January 2005, after a gloomy report on US job losses underscored concern about weakening energy demand in the world's top consumer.

US employers axed payrolls by a shocking 533,000 in November for the weakest performance in 34 years, government data showed.

"You can't get much uglier than this," said Richard Yamarone, chief economist at Argus Research in New York. "The economy has just collapsed and has gone into a free fall."

US crude plunged as low as $41.77 and by 1547 GMT was trading at $41.86, down $1.81. London's Brent crude was off $1.58 at $40.70.

Many dealers and analysts expect oil to test the psychologically important $40 a barrel level fairly soon as evidence mounts of a significant decline in oil demand in all the major developed economies.

US and European companies announced further job cuts on Thursday, with US phone company AT&T saying it would eliminate 12,000 jobs, while chemical maker DuPont Co. planned to drop 2,500.

Leading US retailers also reported dismal November sales on Thursday. Totting up the results, the International Council of Shopping Centers said sales fell by a record 2.7 percent compared to the same period last year.

To try and bolster their feeble economies, European central banks cut interest rates on Thursday.

Sweden's central bank cut by a record 175 basis points, the European Central Bank cut by 75 points and the Bank of England cut by 100 points.

The price fall to nearly four-year lows has prompted OPEC members to call for increasingly strong action when the Organisation of the Petroleum Exporting Countries meets next, on Dec. 17 in Algeria.

OPEC president Chakib Khelil told Algerian state television on Thursday that the oil-producing group should cut oil output by a significant amount at the meeting if prices remain at their current level.

But analysts say another OPEC cut, the third since September, would need to be drastic to provoke a price reaction.

"Cumulatively, OPEC is behind the curve by 4-5 million barrels per day (bpd), Edward Meir, commodities analyst at MF Global said.

"They really need to cut by 2.5 to 3 million barrels to have any impact on prices at the next meeting. Less than 1.5 million will mean another sell off." (Reuters)

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