Oil Is Steady After Drop on Supplies, Dollar, Slowing Demand

By Margot Habiby and Samantha Zee

Aug. 7 (Bloomberg) -- Crude oil futures were little changed after falling yesterday as a report showed an unexpected gain in U.S. crude supplies, the dollar touched a seven-week high and amid speculation a slowing global economy will cut fuel demand.

Crude supplies rose 1.61 million barrels last week, the Energy Department said. Supplies were forecast to fall 200,000 barrels, according to analysts in a Bloomberg survey. Fuel use was 2.6 percent lower in the four weeks ended Aug. 1 than a year earlier. Oil in New York fell as low as $117.11 a barrel yesterday, 20 percent below the record $147.27 on July 11.

``We've been warning about the oil bubble bursting after reaching $150 because of investors pulling money out of the markets and the negative demand reaction,'' said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt. ``At the moment we expect a corrective move to continue.''

Crude oil for September delivery rose 15 cents, or 0.1 percent, to $118.73 a barrel at 9:24 a.m. Sydney time on the New York Mercantile Exchange. Yesterday, oil fell 59 cents, or 0.5 percent, to $118.58 a barrel in New York, the lowest close since May 2.

A drop of 20 percent is a threshold often seen as the start of a bear market. Oil's decline follows a one-year doubling of prices as the dollar weakened, demand in Asia grew and Iran's nuclear program spurred concern that the country, the Middle- East's second-biggest oil producer, might face a military attack from Israel.

Fundamental Shift

``The market focus is shifting back toward the direct oil fundamentals, such as how's demand, where's supply and where are inventories, and away from some of the wider issues like what's the Federal Reserve Board doing with interest rates,'' said Tim Evans, an energy analyst with Citi Futures Perspective in New York.

Brent crude for September settlement fell 70 cents, or 0.6 percent, to $117 a barrel on London's ICE Futures Europe exchange yesterday. Earlier, it touched $115.60 a barrel, 22 percent below its own record high of $147.50.

``The bubble has burst,'' said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida. ``As the dollar continues to stabilize, the excuse for buying commodities is ended. The dollar has been strengthening, and that is one big catalyst that is gone.''

The dollar had weakened for almost three years, trading at a record low $1.6038 per euro on July 15, drawing investors to energy as a new asset class. Credit restrictions affecting the housing and banking industries are now causing many of these investors to cash out.

Commodities Slump

The dollar yesterday touched $1.5398 per euro, its strongest against the European currency since June 16. It traded at $1.5407 at 6 a.m. in Tokyo.

Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, dropped for a fifth session and touched the lowest in almost four months. The index declined 10 percent in July, the biggest monthly slide in 28 years, and is down 16 percent from a record 473.97 on July 3.

The CRB fell 1.17, or 0.3 percent, to 397.24 at 4:03 p.m. in New York, down 16 percent from a record 473.97 on July 3.

U.S. crude supplies rose to 296.9 million barrels in the week ended Aug. 1, the Energy Department said. Gasoline inventories fell for a second consecutive week to their lowest since June. Fuel demand averaged 20.1 million barrels a day during the four weeks ended Aug. 1

Crude last fell 20 percent from a peak in January 2007, when prices declined as low as $49.90. Prices later rebounded and ended that year 57 percent higher.

Meaningful Benchmark?

``I'm not sure 20 percent is a meaningful benchmark, because the rise has been so steep and so quick,'' said Antoine Halff, head of energy research at Newedge USA LLC in New York. ``We're not falling from established levels, but from a brief spike. This is not the same as falling from a plateau where we've been for months.''

Oil has lost more than $28 a barrel since reaching the record less than a month ago as unprecedented fuel costs prompted U.S. consumers to limit spending.

``It feels like there could be more downside, but we don't think there is more than $18 a barrel downside,'' David Pursell, an analyst at Tudor, Pickering, Holt & Co. in Houston, said. ``If you go below $100, OPEC is going to start jawboning and may cut production.''

Gasoline for September delivery lost 0.71 cent to $2.9493 a gallon yesterday. Futures fell 13 percent last month, the biggest drop since September 2006.

``To me, this has been a bear market for months,'' Citi's Evans said. ``The price action didn't reflect it, but the amount of damage that high prices were doing to demand and the general uptrend to OPEC oil production were, in my view, clearly bearish.''

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net; Samantha Zee in Los Angeles at szee@bloomberg.net