Oil extends gains as Asian steel makers drop

Tue Jun 24, 2008 2:44am EDT

By Rafael Nam

HONG KONG (Reuters) - Oil prices climbed further on Tuesday, propped up by worries over supply disruptions in Nigeria and tensions in the Middle East, while Asian stocks eased to new multi-month lows on concerns about the U.S. economy.

Surging energy costs in Asia coincide with signs of a global economic slowdown, a bad omen for a region that relies on exports to help fuel profits.

United Parcel Service Inc , the world's largest package delivery company, warned on Monday that high fuel prices and a sluggish U.S. economy will hit its second-quarter earnings would be below expectations.

Trading was thin, with the dollar and regional bonds steady as investors wait for the outcome of a two-day U.S. Federal Reserve meeting that is widely expected to end on Wednesday with no change to interest rates.


European shares were set to open flat on Tuesday as well.

"Investors are holding back ahead of the U.S. interest rate meeting, as they are keen on hearing the Fed's comments on the economy and any hints about its future stance," said Bae Sung-young, a market analyst at Hyundai Securities in Seoul.

"What the market needs is some sort of positive outlook from the Fed, but we'll see about that."

The MSCI index of Asian stocks outside Japan inched down 0.1 percent, after at one point hitting its lowest since late March.

The index has fallen some 17 percent so far this year, reflecting investor unease about inflation and the global economy, as well as fears of more write-downs by financial firms.

Asian central banks from China to Vietnam, are being forced to tighten monetary policy, as they grapple with surging energy and food costs, bringing an end to several years of double-digit growth in several of the region's bourses.

Tokyo's Nikkei average .N225 closed flat.

Shares in Taiwan fell 1.8 percent, while markets in South Korea , Hong Kong .HSI, and Singapore .FTSTI were down less than 1 percent each.

But shares in Australia and India .BSESN rose, while Shanghai's main index .SSEC gained 1.8 percent.

STEEL MAKERS HIT

Among the big movers in the region, shares in steel makers slumped after Baoshan Iron and Steel (Baosteel) (600019.SS: Quote, Profile, Research, Stock Buzz) agreed on behalf of the Chinese steel industry to the steepest price rise in at least a decade for iron ore term contracts with Rio Tinto

Baosteel shares dropped as much as 10 percent at one point, while South Korea's POSCO fell 1.9 percent, as concerns it would also have to pay up offset its announcement on Tuesday it would raise steel prices.

Australia-listed shares of Rio Tinto gained 3.2 percent, while rival BHP Billiton , which has not signed a deal, rose 2.9 percent in Sydney on expectations it will also win better terms.

BHP had previously launched a formal bid for rival Rio Tinto.

Meanwhile, shares in Origin Energy surged 5.7 percent after British gas producer BG Group submitted a hostile $13.1 bid for the Australian firm.

OIL GAINS

U.S. crude futures prices rose for a third consecutive session, up 15 cents at $136.89 a barrel as of 2:05 a.m. EDT, after already gaining more than $1 on Monday. Oil hit a record $139.89 on June 16.

Saudi Arabia's recent pledge to increase output has been overshadowed by a limited strike by some oil workers at Chevron in Nigeria, raising concerns that supply from the oil producing nation could be disrupted, though it hasn't yet.

On top of that, Iran and Israel are engaged in an escalating exchange of sharp words this month, adding to concerns over supply.

The dollar edged up on Tuesday to 108.05 yen, holding below a four-month high of 108.59 yen hit last week, ahead of the Fed meeting. The euro was little changed at

$1.5522.

The region's government bonds were also largely flat ahead of the Fed. Japan's September 10-year futures were up 0.05 point at 134.05 by early afternoon.