Oil Declines as Stronger Dollar Erodes Hedging Appeal of Crude

By Margot Habiby

Aug. 15 (Bloomberg) -- Oil fell more than $3 a barrel in New York to a three-month low as the stronger dollar curbed the appeal of commodities as an inflation hedge.

Oil has tumbled 24 percent from the record $147.27 a barrel reached on July 11. The U.S. Dollar Index in New York, which tracks the currency against six others, rose to its highest since January on speculation U.S. consumer spending will keep the world's biggest economy out of a recession.

``We're taking our cue from the dollar today,'' said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. ``People were buying commodities against risk in the dollar, war and the economy. The play has been coming off at the same time we're seeing dramatic signs of demand destruction across the globe.''

Crude oil for September delivery fell $3.03, or 2.6 percent, to $111.98 a barrel at 11:07 a.m. on the New York Mercantile Exchange. Oil touched $111.39 a barrel, the lowest since May 1, and has declined 2.9 percent this week.

The dollar index, traded on ICE Futures in New York, was up 0.6 percent to 77.133, its 11th consecutive daily advance.

Gasoline demand was down 2.1 percent in the first seven months of the year as record prices and slower economic growth cut consumer spending, the American Petroleum Institute said Aug. 13. Consumers spent more on gasoline than vehicles and parts for the first time in 26 years in May and June, as U.S. pump prices headed for a record.

Gasoline for September delivery lost 7.8 cents, or 2.7 percent, to $2.8340 a gallon. They're down 1.8 percent this week.

Regular gasoline at the pump, averaged nationwide, fell 0.7 cent to $3.771 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices reached a record $4.114 a gallon on July 17.

Global Economy

Europe's economy contracted in the second quarter for the first time since the introduction of the euro almost a decade ago, a report showed.

``It's not just a U.S. problem, it's a global problem and it's taking its toll on commodities,'' said Peter Luxton, an energy analyst at Informa Global Markets.

European gross domestic product fell 0.2 percent in the second quarter from the first, when it increased 0.7 percent, the European Union statistics office in Luxembourg said yesterday.

``After the Olympics are over, the question is whether demand in the Far East is going to drop off,'' said Gene McGillian, a Tradition Energy analyst in Stamford, Connecticut. ``The market might be reaching the conclusion that some of the measures by the Chinese government to showcase their event are going to be over, and it might start to put a bottom on the market.''

OPEC Report

The global economic outlook led the Organization of Petroleum Exporting Countries to leave its forecast for 2009 oil demand growth unchanged today at the lowest rate in seven years.

The 13-member group left the rate at 1.03 percent, the narrowest since 2002, even after raising its estimates of daily demand in 2008 and 2009 by 90,000 barrels, according to a monthly oil market report today.

``Risks to the outlook for the world oil market appear to be on the downside,'' OPEC said in the report. ``The outlook for the world economy has deteriorated further as more evidence of a global slowdown emerged.''

The dollar headed for a fifth weekly gain against the euro, its longest stretch of increases in more than two years. It traded at $1.4701 as of 10:40 a.m. in New York, compared with $1.4826 yesterday. The U.S. currency has risen 2 percent this week.

Dollar Gains

The oil price and the dollar have shown a long-term correlation whereby increases in one coincide with a drop in the other, said Olivier Jakob, managing director of Petromatrix Gmbh in Zug, Switzerland.

``Oil is still overvalued on the basis of the long-term correlation,'' he said.

Brent crude for October settlement fell $1.60, or 1.4 percent, to $111.04 a barrel on London's ICE Futures Europe exchange.

Crude oil prices may rise next week as U.S. gasoline inventories fall because refineries are cutting output in response to low profit margins.

Nineteen of 30 analysts surveyed by Bloomberg News, or 63 percent, said prices will rise through Aug. 22. It was the most bullish response since December 2006. Seven of the respondents, or 23 percent, said oil will be little changed and four said there would be a drop in prices. Last week 37 percent expected a decline and 34 percent predicted an increase.

September crude oil options expire at the close of trading on the Nymex today. September $110 and $111 puts, which represent the right to sell oil at those prices, were the most actively traded contracts. The $111 put option more than doubled to 20 cents, or $200 a contract, from 8 cents yesterday. One contract is for 1,000 barrels of oil.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.