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Oil prices tumble below $45 on oil reserve report

SIOUX FALLS, S.D. – Energy prices tumbled across the board Wednesday as a government report showed U.S. oil reserves were much bigger than expected, suggesting demand continues to fall.

Sweet crude for February delivery tumbled more than 7 percent, or $3.51 to $45.07 a barrel on the New York Mercantile Exchange after the report was released.

The Energy Information Administration said inventories rose of commercial crude oil inventories rose 6.7 million barrels, well beyond the 1.5 million-barrel build expected by analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., can influence market trading.

Prices remain so low that oil is being stored at sea to avoid selling it at current market prices.

“Demand for oil appears to remain weak as traders are seeking as many as 10 supertankers to store crude,” Addison Armstrong, director of market research at Tradition Energy, said in a research note. “The carriers hold about 2 million barrels of crude and traders are seeking to lease the ships for three to nine months.”

Investors have been concerned that a conflict between Israel and Hamas in Gaza could spread to the rest of oil-rich Middle East and affect supplies.

The 11-day Israeli air and ground offensive, which has killed about 600 people, has probably added about $10 to the price of oil, said Mark Pervan, senior commodity strategist with ANZ Bank in Melbourne.

“The recent gains have been due to a one-off issue in the Middle East,” Pervan said. “Once that calms down, the market could be in for a correction back toward $40.”

On Wednesday, French President Nicolas Sarkozy said that Israel and the Palestinian Authority have accepted an Egyptian-French plan for Gaza.

Sarkozy made no mention of Hamas, the group that controls Gaza and is fighting with Israel, and an Israeli government spokesman stopped short of endorsing the plan.

The escalating gas dispute between Russia and Ukraine has added to market uncertainty. Russia shut off all its gas supplies to Europe through Ukraine. About 80 percent of its deliveries to Europe go through Ukraine.

Equity investors have so far this year brushed off signs of a severe global economic slowdown, pinning their hopes on a second half recovery spurred by massive government spending and lower interest rates.

The Dow Jones industrials, which are up 19 percent since Nov. 20, opened about 100 points lower on Wednesday.

Oil traders often look to stock markets as a barometer of investor sentiment about the economy.

“Consistent negative economic data over the coming weeks from the U.S. and elsewhere will likely be enough to water down this positive mood in the market right now,” said Pervan, who expects oil to average about $40 a barrel this year.

In other Nymex trading, gasoline futures dropped 6.3 cents to $1.1258 a gallon. Heating oil fell 5.4 cents to $1.572 a gallon while natural gas for February delivery fell 17.5 cents to $5.808 per 1,000 cubic feet.

In London, February Brent crude fell 87 cents to $49.66 a barrel on the ICE Futures exchange.

Associated Press writers Alex Kennedy in Singapore and Pablo Gorondi in Budapest, Hungary, contributed to this report.

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