Wednesday, February 27, 2008

Oil falls from $102 on inventories, economy

Crude retreats from record high as supplies rise for 7th straight week and weak economic reports roll in.

By Steve Hargreaves, staff writer

NEW YORK ( -- After setting a new intraday high above $102 a barrel, oil prices turned lower Wednesday following a big rise in inventories and concerns over the nation's economic health.

U.S. light crude for April delivery fell 52 cents to $100.36 a barrel on the New York Mercantile Exchange. Oil had traded down 14 cents just prior to the report's release.

Crude set a new intraday high of $102.08 a barrel earlier in electronic trading. Analysts blamed the spike on investors pouring money into commodities as an inflation hedge against the weak dollar and seeking shelter from volatile stock markets.

But oil slipped after the Energy Information Administration's weekly inventory report. EIA said crude stocks rose by 3.2 million barrels last week, higher than the 2.4 million barrel increase expected by analysts, according to a Dow Jones poll.

Gasoline supplies, attracting more attention as traders anticipate the upcoming summer driving season, rose by 2.3 million barrels. Analysts were expecting a gain of 400,000 barrels. EIA said gas stocks are now above average for this time of year.

Distillates, used to make heating oil and diesel fuel, fell by 2.5 million barrels, slightly more than the 1.8 million barrel drop expected.

Oil hit a new trading high earlier in the session as a series of gloomy economic reports and comments from Fed Chairman Ben Bernanke sent the dollar to record lows against the euro. The euro traded at over $1.51 to the dollar early Wednesday.

In addition to investors flocking to commodities when the dollar falls, the falling greenback also sends oil prices higher as crude is priced in dollar worldwide. A lower dollar thus gives foreign consumers less incentive to conserve oil as crude is, relatively, cheaper for them. It also provides less incentive for oil-exporting countries to increase production, as they need a higher price per barrel to offset the lower dollar.

But one analyst said the falling dollar's effect on crude prices was already priced in by midday Wednesday, and traders began to fear the gloomy economic news behind the dollar's fall will hurt demand for crude.

"The energy market has two masters," said John Kilduff, an energy analyst at MF Global in New York, referring to both its attraction as an inflation hedge and the necessary strong economy to keep demand and prices high.

Kilduff said traders were eying not just the inventory build, but also a lackluster morning report on durable goods orders and a downbeat view on the economy from Bernanke.

"It's helping to feed into the feeling that the economic slowdown will be severe enough that energy demand will slacken," said Kilduff.

Bernanke, in testimony before U.S. lawmakers, said the economy still faces slower growth prospects.

Economic reports Tuesday helped sink the dollar and push oil to its fresh highs.

A survey on residential real estate revealed that the decline in home prices picked up at the end of 2007. And consumer confidence fell to its lowest level in five years, the New York-based Conference Board reported, on fears about the job market and slowing business activity.

But Bernanke also sounded the inflation alarm, and that could have helped send oil prices lower.

He said increasing inflation concerns could "complicate" the Federal Reserve's efforts to stimulate the economy, raising the possibility of a halt in interest rate cuts.

A halt in interest rate cuts could send the dollar higher, and oil prices lower.

Oil prices have nearly doubled over the last year, and has risen five-fold since 2002.

Most analysts say rising demand, especially from developing nations, coupled with few new discoveries of easily accessible oil fields is the main culprit behind the runup.

The tight supply and demand situation has also attracted a slew of investment money, and the falling dollar has played a role as well.

The fact that the world uses nearly as much oil as it produces has magnified the effect of geopolitical tensions, as there is less spare capacity to cover a supply disruption. To top of page

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