By Christopher Twarowski
Washington Post Staff Writer
Wednesday, July 9, 2008

Oil prices tumbled yesterday for a second straight day, sliding $5.33 a barrel due in large measure to softening demand because of the slowdown in the U.S. and European economies.

Oil was off more than $6 a barrel in midday trading on the New York Mercantile Exchange before recovering slightly to settle at $136.04. Over the past two days, oil has skidded more than $9, the biggest decline since March.

Analysts attributed the slide to a number of other factors, including a stronger U.S. dollar and calmer rhetoric in the international dispute over Iran's nuclear plans. Iranian President Mahmoud Ahmadinejad yesterday publicly dismissed the possibility of war with the United States and Israel over his country's nuclear program. Analysts said concerns over a possible military strike against Iran, a major petroleum producer, had earlier helped drive up the price of oil.

Stocks rallied in response to the plummeting oil prices. The Dow Jones industrial average closed up 152.25 points, or 1.36 percent, to 11,384.21. The Standard & Poor's 500-stock index grew by 21.39, or 1.71 percent, to 1273.70, while the tech-heavy Nasdaq climbed by 51.12 points, or 2.28 percent, to close at 2294.44.

"The good news is, oil prices declined sharply," said John Lonski, chief economist for Moody's Investors Services. "The bad news is, it was expectations of a slower global economy that drove prices lower."

Lonski pointed to the J.P. Morgan Global Purchasing Managers Indices, or PMI, as evidence of the worldwide economic slowdown responsible for the drop in demand. The PMI measures the economic growth rate in the manufacturing and services sectors. The latest index, released Thursday, ranked global manufacturing at its lowest level since June 2003. Estimated global GDP growth also clocked in at its lowest since the first quarter of 2003.

"The latest PMI data signaled that the global service sector took a turn for the worse in June, with activity and new business declining for the first time in five months and leading to further job losses," wrote David Hensley, director of global economics coordination at J.P. Morgan Chase.

A monthly report published yesterday by the Energy Information Administration, part of the U.S. Department of Energy, predicted that total U.S. consumption would shrink by 400,000 barrels a day in 2008, a sharper drop than expected in the previous month's report.

The slowing economic activity has also reduced demand for other commodities, whose prices dropped across the board yesterday. For instance, copper futures fell 4 percent and corn futures by 3.3 percent. For traders who have been betting on rising commodity prices over recent months, the reversal was a painful blow.

"It's a tough environment," said Andrew Brooks, head of U.S. commodity trading at T. Rowe Price. "There's a lot of emotion, there's a lot of huge volatility, and it's kind of challenging to figure out how to play here, or how to sort through all the emotion, if you will, and the psychology."

Despite the sharp drop in oil prices this week, the decline did little to reverse the run-up of recent months. The spot market price for oil yesterday is still $68.58 higher than a year ago.

And some analysts predict prices will go higher, despite softening demand in the United States and other industrialized countries, because of mounting demand in China, India and other developing nations.

"There's a bigger picture emerging, said Jeff Rubin, chief economist at CIBC World Markets. "That big picture is going to see oil prices continue to rise despite the fact that the U.S. has already seen peak demand. And by peak demand, I mean that, in five years from now, the U.S. economy is going to consume less oil than it does today."