Oil held above US$122 a barrel yesterday in Asia after dropping more than US$2 overnight on worries about declining demand in the US and abroad.
In its weekly inventory report, the US Energy Department’s Energy Information Administration (EIA) said US demand for gasoline dipped 1.4 percent over the last four weeks. Meanwhile, gasoline inventories rose by 2.9 million barrels last week, more than three times the increase analysts polled by energy research firm Platts had expected.
Concerns about demand have helped pull oil down nearly 10 percent from its May 22 high of US$135.09. Those concerns were exacerbated on Wednesday by the EIA report and by moves by India and Malaysia to cut fuel subsidies, effectively raising their retail prices for everything from gasoline to cooking gas. Many investors believe subsidy cuts will choke off demand for fuel in the developing world.
“There’s definitively smaller demand, [and] you have subsidies that are going to fall in energy consuming nations,” said James Cordier, president of Tampa, Florida-based trading firms Liberty Trading Group and OptionSellers.com. “The psychology is just changing.”
India announced increases that, for example, would boost gasoline prices in New Delhi by 11 percent. Malaysia said it would hike gasoline prices by 41 percent and electricity for commercial and industrial users by 26 percent.
Indonesia and Taiwan, among others, have taken similar steps in recent weeks.
Midafternoon in Singapore, light, sweet crude for delivery next month was up US$0.44 at US$122.74 a barrel in electronic trade on the New York Mercantile Exchange. The contract fell US$2.01 in the floor session to settle at US$122.30 a barrel.
That was oil’s lowest settlement since May 6.
The EIA also said inventories of distillates, which include diesel and heating oil, rose by 2.3 million barrels. Investors shrugged off an unexpected decrease in crude oil inventories.
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.
A weakening dollar can spur investors to buy oil and other commodities as a hedge against inflation, but the effect tends to reverse when the dollar strengthens. A stronger dollar also makes oil more expensive to buyers dealing in other currencies.
Recently, with some fluctuations, the dollar has been gaining against the euro and yen as US economic data supports the view that the Federal Reserve isn’t likely to cut its key interest rate further. In Asian currency trade later afternoon in Tokyo, the dollar was above 106 against the yen, while the euro was changing hands around US$1.54.
Among other factors cited for sustained high prices is the unexpected declines in production from some of key exporters, including Russia, Venezuela and Mexico.
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