Oil Falls for a Third Day as Economic Slowdown May Cut Demand

By Christian Schmollinger

Aug. 12 (Bloomberg) -- Crude oil fell for a third day on signs that a U.S. economic slump will extend into 2009, paring fuel demand in the world's biggest oil consumer.

The U.S. economy will grow at an average 0.7 percent annual pace from July through December, half the gain in the first half of the year, a Bloomberg News survey showed. The dollar is trading near a 5 1/2-month high against the euro, reducing the need for commodities as a hedge against inflation. China, the second-largest oil consumer, said yesterday imports fell in July.

``The market focus has shifted to the weakness in demand, and also the firmer U.S. dollar is playing a part as well,'' said David Moore, a commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney. ``The Chinese economy isn't growing as strong as last year.''

Crude oil for September delivery fell as much as 69 cents, or 0.6 percent, to $113.76 a barrel, in after-hours electronic trading on the New York Mercantile Exchange. It was at $113.96 a barrel at 10:42 a.m. Singapore time.

Yesterday, futures fell 75 cents, or 0.7 percent, to settle at $114.45 a barrel, the lowest close since May 1. Oil has declined 23 percent from the record $147.27 reached on July 11.

Prices are also down as the dollar traded near a 5 1/2- month high to the euro, reducing the need for commodities as a hedge against inflation. The dollar gained on speculation the economic slowdown that started in the U.S. is spreading.

The dollar traded at $1.4872 against the euro at 10:23 a.m. in Tokyo from $1.4909 yesterday.

China's July crude-oil imports fell 7 percent from a year earlier after global prices increased to a record, discouraging refiners from purchasing raw materials to process into fuels.

Hedge Funds Short

Hedge funds and other speculators increasing their net- short positions in futures contracts have also spurred crude oil's decline, said Jonathan Kornafel, director for Asia at Hudson Capital Energy in Singapore.

Speculative short positions, or bets prices will fall, outnumbered long positions by 5,550 contracts on the New York Mercantile Exchange in the week ended Aug. 5, the Commodity Futures Trading Commission said in its Commitments of Traders report on Aug. 8. Net-short positions rose by 4,890 contracts, or 741 percent, from a week earlier.

``Everyone sees that the hedge funds are reversing their positions,'' said Kornafel. ``Everyone is out of the short dollar, long crude position and that's what seems to be driving the market.''

Tankers Move

Prices rose in early trading yesterday as five days of clashes between Russia and Georgia threaten alternative export routes from Azerbaijan, needed because of a pipeline fire.

A fire on the Turkish stretch of the Baku-Tbilisi-Ceyhan pipeline was extinguished yesterday following an explosion last week. Georgia is a key link in a U.S.-backed southern energy corridor that connects the Caspian Sea region with world markets, bypassing Russia. The Baku-Tbilisi-Ceyhan pipeline ships Azeri Light crude.

Tankers moved as much as 15 miles (24 kilometers) out to sea, Batumi-based Garsevan Jorbenadze, a ship agent at TeRo Co. Ltd. who arranges for ships to dock and load, said by phone yesterday. The nearby oil terminal of Supsa, also on the Black Sea, appears to be operational, with one ship waiting to enter the port, he said.

Brent crude oil for September settlement fell as much as 67 cents, or 0.6 percent, to $112 a barrel on London's ICE Futures Europe exchange at 10:34 a.m. Singapore time. It fell 66 cents, or 0.6 percent, to settle at $112.67 a barrel yesterday, the lowest since May 1.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.