Oil Near $40 as Investors Eye Gaza Conflict

"This problem isn't going to go away overnight. It's been a big disaster."

Still, expectations that a slowing global economy will dampen crude demand have helped contain the rally in oil prices. If the Israel-Gaza conflict doesn't escalate, prices could break below $30 during the next few months, Kornafel said.

"I don't expect any positive surprises for GDP, housing data, jobless claims, or manufacturing data," he said. "It's all going to be negative for at least the next couple months."

Oil prices have fallen 73% since peaking at $147.27 a barrel on July 11 -- and with them the cost of derived products such as heating oil and gasoline. That is welcome news for consumers worldwide in otherwise gloomy economic circumstances.

At U.S. the pumps, "gasoline fell for the twenty-fourth week since the 4th of July holiday," wrote trader and analyst Stephen Schork, in his Schork Report. "As of Monday, prices in the U.S. fell by 4 cents ... to a national average (of) $1.613 a gallon.

"That is the lowest price at the pump in nearly five years, i.e. since the week ended January 19th, 2004!"

Gasoline futures fell by less then a penny Tuesday on the Nymex trading, fetching 87 cents a gallon, while heating oil was basically flat at $1.28 a gallon. Natural gas for February delivery was down by a cent $6.07 per 1,000 cubic feet.

In London, February Brent crude fell 50 cents to $40.05 a barrel on the ICE Futures exchange.

The Organization of Petroleum Exporting Countries, which accounts for about 40% of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months. However, investors are skeptical the 13-nation group will adhere to the new output quotas.

"The market is looking for compliance," Kornafel said. "OPEC needs to show they are sticking to these very pronounced cuts they've already announced."

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Associated Press writer Alex Kennedy contributed to this report from Singapore.