Oil Falls to $118 as Storm Danger Abates, Demand Concern Grows

By Grant Smith

Aug. 5 (Bloomberg) -- Crude oil fell to $118 a barrel on
speculation Tropical Storm Edouard will leave U.S. oil rigs and
refineries undamaged and as commodities prices tumble because of
the slowing U.S. economy.

Oil dropped to its lowest level since May 5 as Edouard's wind speeds remained below hurricane strength. Gold, platinum and wheat dropped on speculation slower growth will curb demand and as a stronger dollar dulled the appeal of commodities as an inflation hedge.

``As the storm no longer appears an immediate threat, the dominant theme is still weaker demand,'' said Andrey Kryuchenkov, an analyst at London-based Sucden (U.K.) Ltd. ``Dropping below support levels around $120, where buying had first kicked in April, has probably triggered a lot of sell- orders.''

Crude oil for September delivery fell as much as $3.41, or 2.8 percent, to $118 a barrel in electronic trading on the New York Mercantile Exchange. The contract traded at $119.34 at 1:32 p.m. London time.

Oil has lost almost $30 since touching a record of $147.27 a barrel in New York on July 11 as unprecedented fuel costs prompted U.S. consumers to limit spending on fuel. Yesterday, the UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials fell 3.25 percent, its biggest loss since March.

``Very little oil production seems to have been shut in by Edouard,'' said Christopher Bellew, a senior broker at Bache Commodities Ltd. in London. ``Gasoline stocks are high enough to limit any crisis from refinery shutdowns, so the market's returning its attention to the weak demand picture.''

Gasoline Stockpiles

U.S. gasoline stockpiles are 3 percent above their five- year seasonal norm at 213.6 million barrels, according to the Energy Department. The department will probably say gasoline supplies fell 1.75 million barrels last week in its weekly report tomorrow, a Bloomberg survey predicted.

The dollar rose to a six-week high against the euro before a Federal Reserve meeting today at which policy makers may leave interest rates on hold and highlight concern about inflation. The dollar traded at $1.5494 per euro, the strongest level since June 24.

``It s going to be difficult to retrace another $20 up,'' Jason Gammel, an analyst at Macquarie Bank Ltd. in New York said in a radio interview. ``The market's adequately supplied. We've seen enough incremental demand peeled out of the developed countries as a result of the high prices.''

Tropical Storm Edouard was blowing towards Galveston, Texas, with winds as fast as 65 miles (100 kilometers) per hour, prompting the evacuation of some oil and gas rigs. Galveston is the biggest U.S. petroleum port.

U.S. producers have idled less than 1 percent of oil output and 7.2 percent of natural gas production in the Gulf of Mexico because of the storm, the U.S. Minerals Management Service said.

Brent Crude

Brent crude for September settlement fell as much as $3.77, or 3.1 percent, to $116.91 a barrel on London's ICE Futures Europe exchange, and was at $118.51 at 1:14 p.m. London time.

Kuwait ``isn't worried'' about the recent price decline and doesn't expect the Organization of Petroleum Exporting Countries to reduce production quotas when it meets next month, Oil Minister Mohammed al-Olaim said in an interview today.

``Supply is going to continue as it is, no reduction,'' al- Olaim said. ``By all means there is no cut in production, although there is a very big drop in prices.''

The flow of crude oil from Kirkuk in Iraq to Turkey's Mediterranean port of Ceyhan resumed today after stopping two days ago, according to officials at Botas, the Turkish pipeline operator.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net