Oil eases to $123, U.S. demand in focus

Mon Jul 28, 2008 10:19am EDT

By Alex Lawler

LONDON (Reuters) - Oil fell to $123 a barrel on Monday, giving up an earlier gain, as dealers focused on renewed signs of faltering demand in top fuel consumer the United States.

The U.S. Transportation Department said the number of miles driven on U.S. highways in May fell a record 3.7 percent from last year. That put a brake on a rally caused by an attack on Nigeria's oil industry.

"It looks like the pattern of last week, of rallies which are then sold into, is going to be repeated," said Christopher Bellew of Bache Commodities.

U.S. crude was down 20 cents at $123.06 a barrel by 10:15 a.m. EDT, off a high of $125.22. London Brent was down 11 cents at $124.41.

The main militant group in Nigeria's Delta region said it had attacked two Royal Dutch Shell pipelines. Shell said it halted some production due to the incident but declined to say how much.

The incident in Nigeria followed the kidnapping of eight foreign oil workers last week and two bomb blasts in Istanbul on Sunday. No one has claimed responsibility for the Turkish attacks.

Oil has fallen from a record high of $147.27 on July 11, pressured by signs that record-high prices and slowing economies are curbing demand. Dealers said prices could still head lower for now.

MILES DRIVEN

In the latest sign that demand is being eroded, the number of miles driven on U.S. highways in May fell a record 3.7 percent, or 9.6 billion miles, on last year, the Transportation Department said.

It was the biggest drop ever for May, which usually sees increased traffic due to Memorial Day vacations and the beginning of summer. However, high gasoline prices discouraged driving.

"We now seem to be in the situation where every rally is being sold," said Glen Ward, joint head of commodities at ODL Securities in London.

"We still have bullish headlines -- bombings of pipelines in Nigeria, tropical storms/hurricanes and the ongoing Iranian nuclear issue -- but these all seem outweighed by the drop in demand due to the high oil price."

Data from the Commodity Futures Trading Commission released on Friday showed that speculative funds were shifting to a net short position -- a bet on falling prices -- for the first time in 17 months.

Developments in Iran provided some support. The country has more than 5,000 active centrifuges for enriching uranium, its president said, suggesting a rapid expansion of nuclear work.

President Mahmoud Ahmadinejad's announcement was likely to annoy major powers which have offered Iran a package of economic and other incentives to persuade Tehran to suspend its enrichment activities.

(Additional reporting by Ikuko Kao in London and Fayen Wong in Perth; editing by James Jukwey)