Create a free account to continue

Demand Fears Push Oil Prices Downward

Oil dropped below $127 a barrel on worries that prices are cutting into demand and as a probe into futures trading by a U.S. regulator continued to weigh on the market.

(AP) -- Oil dropped below US$127 a barrel Monday on worries that prices are cutting into demand and as a probe into futures trading by a U.S. regulator continued to weigh on the market.

Light, sweet crude for July delivery was down US$1.11 to US$126.24 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe.

On Friday, the contract settled at US$127.35 a barrel, up 73 cents after dipping below US$125 and then rebounding.

In London, July Brent crude futures fell US$1.27 to US$126.51 a barrel on the ICE Futures exchange in London.

Jitters about record high fuel and energy prices -- particularly in the U.S., which has just started its summer driving season -- have helped to pull oil off the US$135.09 a barrel trading record hit May 22. Data from the U.S. Energy Department and Federal Highway Administration and several surveys in recent days suggest American consumers are driving less.

The decision by some countries in Asia, like Indonesia and Taiwan, to lower subsidies on oil products, also was seen as having a bearish effect on the market.

Additional selling pressure came with last week's announcement from the Commodity Futures Trading Commission about an investigation into possible price manipulation in oil futures markets. The commission also announced new rules designed to increase transparency of U.S. and international energy futures markets.

''There are more concerns on the high pricing we have seen, that it will have a negative impact on demand, and the fact that the CFTC is expanding its investigation of manipulation in the oil markets,'' said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

''The seesaw we've seen in the last few days is an indication that the oil market may have peaked,'' Shum said.

''Having said that ... the reality is that even though we have crude off the peak of US$135 there are still supply-side issues going forward,'' he said. ''The hurricane season is certainly one factor to contend with.''

Tropical Storm Arthur formed Saturday afternoon -- one day before the official start of the 2008 Atlantic Hurricane season -- and though it caused the temporary closure of two of Mexico's oil export ports, it wasn't expected to cause any severe disruptions to oil shipments. On Sunday, the storm weakened to a tropical depression.

Investors also had other supply worries on their mind.

On a trip to the Middle East over the weekend, U.S. Treasury Secretary Henry Paulson said there was ''no quick fix'' to high oil prices because it is an issue of supply and demand. He was on the trip to deliver a message to officials of Saudi Arabia and other oil-producing nations that soaring oil prices are putting a burden on the global economy.

Global demand remains strong while ''production capacity has not seen new development,'' Paulson said Sunday in Qatar. His trip was designed to urge Mideast producers to allow more outside investment to boost output.

The day before, though, the current president of the Organization of Petroleum Exporting Countries again blamed the weak U.S. dollar, speculation and the subprime crisis for the spiraling price of oil.

Algerian Energy Minister Chakib Khelil said the cartel will make no new decision on production levels until its Sept. 9 meeting in Vienna. He said oil's record prices do not reflect markets conditions, an oft-repeated OPEC position.

In other Nymex trading, heating oil futures fell 2.27 cents to US$3.6440 a gallon (3.8 liters) while gasoline prices declined 2.72 cents to US$3.3210 a gallon. Natural gas futures were up 11.4 cents to US$11.817 per 1,000 cubic feet.

AP Business Writer Thomas Hogue in Bangkok, Thailand, contributed to this report.

More in Supply Chain