Oil fell over 3% today, as signs of the sickly world economy outweighed tension in the Middle East due to the Israeli-Hamas conflict.
The fall came with a raft of demand-destructive news, including signs that the US holiday shopping season was the weakest since 1970 and consumer confidence in the world's largest energy user was at record lows in December.
US crude was down $1.36 at $38.66 a barrel, having earlier touched a session high of $40.39. London Brent fell $1.12 cents to $39.43.
Oil prices had jumped as much as 12% yesterday after Israel launched its fiercest air offensive in the Hamas-ruled Gaza strip in decades.
Analysts said that prices rose yesterday because of a 'political risk premium' resulting from the violence in Gaza. However, they added that underlying weak demand for energy was now weighing on prices.
A sharp global downturn has slashed world demand, pulling prices down sharply from record highs of above $147 in July. New York crude plunged earlier this month to below $33, its lowest point for almost five years.
Israel today rejected world appeals for a truce and warned its deadly assault on Gaza could last for weeks as warplanes hit Hamas positions for a fourth day and tanks massed on the border.
The fighting has fuelled fears of wider tensions in the oil-rich Middle East, temporarily pushing up prices, traders said. Thin volumes owing to the year-end holiday season also made for some price volatility.
Analysts said yesterday's sharp price gains had also been supported by evidence that the OPEC oil producers' cartel was cutting output in line with an announcement earlier this month. Previous OPEC cuts have often been met with only partial compliance.
Oil prices have plunged by as much as 78% since hitting record heights in July, as traders fret about the threat of a global recession - defined as two quarters of negative economic growth in a row.
Recession has so far infected the euro zone, Japan and the US, while even Asian powerhouse China is experiencing slower growth as a global financial crisis takes its toll.
Prices begun 2008 by vaulting above $100 for the first time as traders worried about violence in oil exporter Nigeria and supply problems in the key US energy market. Continued geopolitical tensions saw oil rocket above $120, $130 and $140 on their way to setting all-time highs by mid-year.
