Crude Oil Falls as Stronger U.S. Dollar Curbs Hedging Appeal

By Grant Smith

Sept. 5 (Bloomberg) -- Crude oil fell, set for its biggest weekly decline in a month, as the dollar gained, curbing demand for commodities as a currency hedge.

Oil has fallen more than 7 percent this week as the euro dropped to the weakest this year against the dollar. U.S. daily average implied fuel demand so far this year is down 4.1 percent at 19.9 million barrels from a year ago, U.S. Energy Department data showed yesterday.

``The oil price is simply following the strength in the dollar,'' said Gerrit Zambo, an oil trader at BayernLB in Munich. ``We see significant hints for slower economic growth in Europe, which is strengthening the dollar.''

Crude oil for October delivery fell as much as $2.13, or 2 percent, to $105.76 a barrel, and traded at $106.41 at 10:05 a.m. London time on the New York Mercantile Exchange. Yesterday the prices settled at $107.89, it s lowest close since April 4.

Prices are down 27 percent from the record $147.27 reached July 11. The dollar's decline earlier this year had prompted investors to buy commodities, helping to push crude oil, gold, corn and gasoline to records.

The euro was at $1.4239 against the U.S. dollar at 9:45 a.m. London time from $1.4498 yesterday. It touched $1.432, the lowest since Dec. 21. The European currency has dropped for six straight days.

The European Commission's 2008 growth forecast will be cut to as low as 1 percent next week, from a previous forecast of 1.7 percent, Luxembourg Finance Minister Jean-Claude Juncker, who chairs a group of counterparts from the euro-area, said yesterday.

``The rally in the U.S. dollar is weighing on prices, and adding to that is the weak macro economic data from the U.S. and Europe,'' said Toby Hassall, an analyst at Commodity Warrants Australia. ``The outlook looks bearish and funds are selling off on fundamental weakness.''

The Organization of Petroleum Exporting Countries, the supplier of 40 percent of the world's oil, will probably keep producing at a record pace, according to Goldman Sachs Group Inc.'s Chief Economist Jim O'Neill. Twenty-nine of 32 analysts surveyed by Bloomberg held the same view.

O'Neil expects ``some volatility'' in prices leading up to the 13-nation group's Sept. 9 meeting in Vienna, followed by a decline.

``Given demand destruction, we are going to come down further'' once the meeting is over, O'Neill said in an interview with Bloomberg from a conference in Cernobbio, Italy.

Brent crude oil for October settlement was at $104.41 a barrel, down $1.89, at 9:44 a.m. London time on London's ICE Futures Europe exchange. Yesterday, the contract fell $1.76, or 1.6 percent, to settle at $106.30 a barrel.

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