Crude Oil Falls as Dollar's Gain Dims Appeal of Commodities

By Mark Shenk

Oct. 21 (Bloomberg) -- Crude oil fell as the U.S. dollar rose to its highest in more than a year against the euro, dimming the appeal of commodities as a currency hedge.

Oil climbed earlier on expectations that OPEC, supplier of 40 percent of the world's oil, will reduce output at a meeting in Vienna this week. Investors looking for protection against the dollar's decline earlier this year helped lead crude oil, gold, corn and gasoline to records.

``The strengthening of the dollar is the main factor pushing most commodities lower, and oil is always the leader,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``The Saudis will probably go along with a significant cut to maintain cohesion in the group.''

Crude oil for November delivery declined $2.50, or 3.4 percent, to $71.75 a barrel at 10:12 a.m. on the New York Mercantile Exchange. Prices, which have tumbled 51 percent since reaching a record $147.27 on July 11, are down 18 percent from a year ago.

The November contract expires today. The more-active December contract fell $2.08, or 2.8 percent, to $72.31 a barrel. The October oil contract rose by a record $16.37 a barrel when it expired on Sept. 22, as traders unwound positions and the dollar fell the most against the euro since January 2001.

Gold, copper and soybeans also fell today. Investors often sell crude and other dollar-priced commodities when the U.S. currency gains, undermining their use as an inflation hedge. The dollar climbed to $1.3154 against the euro, the strongest since March 2007, from $1.3344 yesterday in New York.

`Tight Corner'

``The cartel is in a tight corner,'' said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut. ``They don't want to contribute to a further global economic slowdown. The Saudis for sure know that it's not in their interest to see this occur, so they may limit what they do immediately.''

Iran, OPEC's second-largest producer, said it favors a cut of between 2 million and 2.5 million barrels a day. Besides Iran, ministers from Algeria, Libya, and Qatar have said the Organization of Petroleum Exporting Countries will need to trim supplies when it gathers on Oct. 24 in Vienna.

Saudi Arabia, which dominates OPEC proceedings as the group's largest producer, has yet to comment on its intentions.

``Expectations of a substantial cut sent prices higher after the announcement of the meeting,'' said John Kilduff, senior vice president of risk management at MF Global Inc. in New York. ``The Saudi silence isn't boding well for an aggressive cut that's being called on by some members. The Saudis would probably have to make most of the cuts.''

Stockpile Increase

The U.S. Energy Department will probably report tomorrow that oil and gasoline supplies rose last week, a Bloomberg News survey showed. Crude-oil inventories climbed 2.65 million barrels in the week ended Oct. 17, according to the survey. It would be the fourth-straight weekly gain.

``Prices are also being hit by expectations about tomorrow's report,'' McGillian said. ``We are looking forward to further inventory builds as demand drops.''

Brent crude oil for December settlement fell $2.46, or 3.4 percent, to $69.57 a barrel on London's ICE Futures Europe exchange.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.