Oil falls below $39 on fears of weaker crude demand

— -- Oil prices dipped below $39 a barrel Tuesday on fresh evidence of weakness in the U.S. housing market and a shrinking gross domestic product that suggests the recession may be worsening.

A report by the Commerce Department showed that sales of new homes fell in November to the slowest pace in nearly 18 years, while new home prices dropped by the biggest amount in eight months.

"The energy markets are reacting first and foremost to bad economic news, and it seems like they're almost waiting for something bad to occur," said oil analyst Peter Beutel of Cameron Hanover.

A steady outpouring of gloomy economic news has pushed to the background events that over the summer may have led to price spikes, like OPEC's announcement this month of unprecedented production cuts, Beutel said.

Prices have fallen 73% since July, with massive job layoffs and weak consumer spending eating away at energy use.

"Boy, it really looks ugly for the start of 2009," said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.

"It's really difficult to find something between now and inauguration time that says people are going to feel better, they're going to drive more, they're going to ship more packages," Kloza said.

Light sweet crude for February delivery fell 93 cents to settle at $38.98 on the New York Mercantile Exchange after dipping to $37.79 earlier in the day.

Oil traders have grown increasingly pessimistic about the global economy, and thus demand for energy.

Economists now believe a small decline in economic activity in the third quarter has worsened significantly.

The Commerce Department said Tuesday that the gross domestic product, the broadest measure of economic health, declined at an annual rate of 0.5% in the July-September quarter. Corporate profits fell 1.2%.

Some economists believe the economy's decline in the October-December period could be as large as 6%. If so, that would be the worst quarterly drop since 1982.

The pain appears to have spread through almost every level of the economy. On Tuesday, shares of card maker American Greetings sank to their lowest level in 21 years after the company reported it swung to a loss in its third quarter.