Oil prices dropped below US$124 a barrel yesterday in Asia as demand concerns deepened and after US Federal Reserve Chairman Ben Bernanke indicated that more US interest rate cuts are unlikely.
Bernanke’s comments suggesting inflation is too much of a concern to contemplate more rate hikes sent the dollar higher and raised questions about oil’s ability to reach new highs in the short term.
Bernanke signaled the Fed is inclined to leave rates where they are for now, but some analysts said he might be taking a step toward an eventual rise in rates later this year or early next year.
Midafternoon in Singapore, light, sweet crude for July delivery was down US$0.66 at US$123.65 a barrel in NYMEX electronic trading. The contract fell US$3.45 to settle at US$124.31 a barrel in the previous session.
That was oil’s lowest settlement price for a front-month contract on the NYMEX since May 15. Prices are now more than US$11 below the trading record of US$135.09 a barrel hit on May 22.
Evidence continues to mount that oil prices amounting to nearly twice what they did a year ago have cut demand.
The latest MasterCard Spendingpulse survey found that demand for gasoline in the US fell by 4.7 percent last week — which included the long Memorial Day holiday weekend — compared with the same week last year. Averaged over the last four weeks, demand was down 6 percent last week compared with last year.
That dovetails with recent data from the US Energy Department and Federal Highway Administration, as well as several other surveys suggesting high prices are cutting Americans’ appetite for fuel. The US is by far the world’s largest consumer of energy and oil products, and swings in demand there can have an outsized impact on global prices.
“Investors are ... wondering if we’ve got to the point, with prices around US$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, which bounced higher on Bernanke’s comments in his speech via satellite to an international monetary conference in Spain.
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 run-up in oil prices as investors bought commodities such as oil as a hedge against inflation.
But when the dollar strengthens, the effect reverses, and oil fell on Tuesday as the dollar gained against the euro and yen.
In currency trading early yesterday afternoon in Tokyo, the dollar had weakened slightly to around 104.80 to the yen, while the euro was slightly stronger near US$1.5470.
“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 on forecasts that US oil and fuel supplies rose last week. Analysts polled by energy research firm Platts expect the US Energy Department to report that oil inventories rose by 2.7 million barrels last week. The department’s Energy Information Administration was to issue its weekly inventory report later yesterday.
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