Oil slides below $125 on dollar, demand concerns

June 3, 2008 1:27:42 PM PDT
Oil prices fell sharply Tuesday, dropping below $124 a barrel as demand concerns grew and Federal Reserve Chairman Ben Bernanke indicated that more interest rate cuts are unlikely. Bernanke's comments sent the dollar higher and raised questions about oil's ability to reach new highs in the short term. Light, sweet crude for July delivery fell $3.77 to $123.99 a barrel on the New York Mercantile Exchange. Prices continued falling in after-hours electronic trading, dipping as low as $123.90, the lowest trading level since May 15. Final settlement prices weren't yet available. Prices peaked at a record $135.09 on May 22.

Retail gas prices, meanwhile, rose slightly to a new record near $3.98 a gallon, but could fall if oil prices continue to decline.

The latest MasterCard SpendingPulse survey found that demand for gasoline fell by 4.7 percent last week -- which included the long Memorial Day holiday weekend -- compared to the same week last year. Averaged over the last four weeks, demand was down 6 percent last week compared to last year.

That dovetails with recent data from the Energy Department and Federal Highway Administration, as well as several other surveys suggesting high prices are cutting American's appetite for fuel. A new survey by RBC Capital Markets finds about 90 percent of Americans have made changes in their daily lives to counter high energy prices, including driving less and taking public transportation more often.

On Tuesday, General Motors Corp. said it would close four truck and SUV plants in the U.S., Canada and Mexico as surging fuel prices hasten a dramatic shift to smaller vehicles.

"Investors are ... wondering if we've got to the point, with prices around $130 a barrel, if that's too much for consumers to bear," said Rachel Ziemba, an analyst at RGEMonitor.com in New York.

Also weighing on prices was the strengthening dollar. In a speech via satellite to an international monetary conference in Spain, Bernanke suggested that further rate cuts are unlikely because of concerns about inflation. Since last year, a series of Fed cuts designed to shore up the economy has led to a protracted decline in the dollar's value against the euro. That helped feed the record runup in oil prices as investors bought commodities such as oil as a hedge against inflation.

On Tuesday, that effect reversed; the dollar gained ground on Bernanke's comments, and investors who'd bought oil as part of a hedging strategy sold. Also, a stronger dollar made oil more expensive to investors dealing in other currencies.

"With Bernanke implying that there won't be ... more interest rate cuts, that removes one contributing factor that's been driving oil prices," Ziemba said.

Oil prices also fell Tuesday on forecasts that domestic oil and fuel supplies rose last week. Analysts polled by energy research firm Platts expect the Energy Department to report that oil inventories rose by 2.7 million barrels last week. The department's Energy Information Administration will issue its weekly inventory report Wednesday morning.

Kurdistan's Prime Minister Nechirvan Barzani said Tuesday that Iraq should boost crude oil export capacity to 6 million barrels a day, three times the amount the country is exporting now. But Iraq's oil industry is plagued by a lack of modern equipment and training after decades of U.N. sanctions, war and Saddam Hussein's rule. The country plans to boost oil output from 2.5 million barrels a day to 3 million barrels a day by the end of 2008 and 4.5 million barrels a day by end of 2013.

At the pump Tuesday, the national average price of a gallon of regular gas rose 0.3 cent to $3.978 a gallon, according to a survey of stations by AAA and the Oil Price Information Service. Prices are 82 cents higher than a year ago, but have stalled in recent days on what once appeared to be a relentless march toward a national average of $4 a gallon.

Prices are already higher than that in many parts of the country, and average more than $4 in 12 states and the District of Columbia. Still, prices may not reach the $4 mark nationally if oil prices continue to retreat.

Diesel prices have fallen in recent days; the average national price of a gallon of diesel slipped 0.5 cent Tuesday to $4.78 a gallon, according to AAA and OPIS. Diesel prices, which peaked at a record $4.792 a gallon on May 30, have pushed up the price of food and consumer goods transported by truck, rail and ship.

Many analysts have long questioned whether high oil prices could be sustained; many blame speculative investing fueled by the falling dollar for a near doubling of crude prices over the past year.

In other Nymex trading Tuesday, July gasoline futures fell 4.28 cents to $3.3479 a gallon, and July heating oil futures fell 8.56 cents to $3.6364 a gallon. July natural gas futures bucked the rest of the complex, rising 24.6 cents to $12.215 per 1,000 cubic feet as forecasts for high temperatures throughout much of the U.S. raised demand for natural gas from electric utilities.

In London, July Brent crude futures fell $3.52 to $124.50 on the ICE Futures Exchange.


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