Oil Falls as Stronger U.S. Dollar Cuts Demand for Commodities

By Nesa Subrahmaniyan and Grant Smith

Aug. 8 (Bloomberg) -- Crude oil fell, heading for its fourth decline in five weeks, as the dollar gained, reducing the appeal of commodities as a currency hedge.

Oil, metal and crop prices fell as the dollar jumped to a five-month high against the euro. A stronger U.S. currency tends to spark sales by investors who bought commodities as an alternative to holding the dollar. Crude has fallen almost $30 from its July record amid speculation that slower global economic growth and high prices will cut demand for fuel.

``Oil is following the euro-dollar and that's keeping pressure to the downside,'' said Gerrit Zambo, an oil trader at BayernLB in Munich. ``There are worries about the economic situation with expectations of flat demand.''

Crude oil for September delivery fell as much as $1.85, or 1.5 percent, to $118.17 a barrel on the New York Mercantile Exchange. The contract traded at $118.46 at 9:54 a.m. London time. Price have fallen 4.8 percent this week.

Futures dropped to $117.11 a barrel this week after U.S. inventories crude unexpectedly increased. That's more than 20 percent below the record $147.27 on July 11, a threshold commonly seen as the start of a bear market.

Crude oil may fall next week amid weakening demand caused by a global economic slowdown. Thirteen of 35 analysts surveyed by Bloomberg News, or 37 percent, said prices will drop through Aug. 15. Last week 45 percent expected a decline.

Dollar Gains

The dollar headed for its biggest weekly gain against the yen in two months. The euro was on course for its fourth weekly decline, its worst losing streak since May 2007, after European Central Bank President Jean-Claude Trichet said risks to economic growth are ``materializing,'' reducing expectations policy makers will raise interest rates.

The euro fell to $1.5195, the lowest since March 5, before trading at $1.5234. It headed for a 2 percent decline this week.

A fire on BP Plc's oil pipeline in eastern Turkey may keep burning today and tomorrow, delaying the start of damage assessment, Turkey's Energy Ministry said today.

The fire has shut down the pipeline that carries as much as a million barrels of oil a day from Azerbaijan to Turkey, and halted crude exports from the Turkish port of Ceyhan. The Kurdistan Workers' Party, or PKK, said it bombed the pipeline as part of its campaign for autonomy in southeast Turkey.

Output from Russia and the other former Soviet states averaged 12.8 million barrels a day in 2007, including 868,000 barrels a day from Azerbaijan, according to the BP Statistical Review of World Energy. The U.S. imported 68,000 barrels a day from Azerbaijan in May, the latest data from the Energy Department shows.

Brent crude for September delivery fell as much as $1.97, or 1.7 percent, to $115.89 a barrel on ICE Futures Europe exchange. It traded at $116.20 at 9:44 a.m. London time.

U.S. crude-oil supplies rose 1.61 million barrels, or 0.6 percent, last week, the U.S. Energy Department said on Aug. 6. Gasoline supplies fell 4.34 million barrels, or 2 percent, to 209.2 million barrels, the biggest drop since April.

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net; Grant Smith in London at gsmith52@bloomberg.net.