Oil prices fall on demand concerns

2008-10-21 22:57

From The Australian - October 22, 2008

Read Full Article: http://www.theaustralian.news.com.au/business/story/0,28124,24534520-12829,00.html

Oil prices retreated from the previous day's gains in New York as the market's attention shifted back to the weak economy. Light, sweet crude for November delivery expired at $US70.89 a barrel, down $US3.36, or 4.5 per cent on the New York Mercantile Exchange. Trading was light in the expiring contract, with heavier activity seen in December crude, which settled at $US72.18 a barrel, down $US2.21, or 3 per cent. December Brent crude on the ICE futures exchange closed down $US2.29 at $US69.74 a barrel.

Oil prices ended a two-day move higher as renewed concerns about the weakening global economy replaced speculation about a production cut by the Organisation of Petroleum Exporting Countries. The US dollar hit a 19-month high against the euro, in the latest sign that large speculators are abandoning markets viewed as high-risk. Oil has seen its share of fund outflows, and futures took an additional blow as investors sold oil priced in US currency to compensate for the strengthening US dollar. The euro recently traded at $US1.3124.

Market participants are also expecting further evidence of declining demand with the release tomorrow (AEDT) of weekly US oil and product inventory data. Oil and gasoline stocks have risen sharply in recent weeks, as Gulf Coast refiners return to service following Hurricane Ike, even as the economic downturn reduces consumption. Analysts gave an average forecast of a 2.4-million-barrel build for oil, a 2.8-million-barrel petrol inventory increase and a 100,000-barrel rise in distillate stocks.

"Expectations are factoring into trading today of another big build in crude stocks and another big build in gasoline stocks," said Andy Lebow, with MF Global. The stronger US dollar and demand concerns temporarily shifted the market's focus away from the October 24 meeting of the Organisation of Petroleum Exporting Countries, where the group is expected to cut production.

OPEC is widely seen announcing a reduction of at least 1 million barrels a day, but questions remain about whether the world's largest exporter, Saudi Arabia, will comply, or if the cut will be enough to counter sinking demand. OPEC hasn't yet decided whether to cut production, secretary-general Abdullah al-Badri said in Moscow. The group has limited options, as too great a cut will force demand even lower, while a small reduction would do little to raise prices, said Phil Flynn, an analyst with Alaron Trading. "They're really caught between a rock and a hard place," Mr Flynn said. "The market is showing a lack of respect for what they can actually do in this type of environment."