Oil prices fall near $123 on demand concerns, stronger dollar

Analysis

Oil prices fell Tuesday as the US dollar strengthened and helped outweigh supply concerns sparked by the sabotage of two oil pipelines by militants in Nigeria.

Continuing fears about falling demand in the United States also helped push down prices. By mid-afternoon in Europe, light, sweet crude for September delivery was down $1.13 to $123.60 a barrel in electronic trading on the New York Mercantile Exchange. Earlier Tuesday, prices rose as high as $125.85 before falling. On Monday, the contract rose $1.47 to settle at $124.73 a barrel. In London, September Brent crude lost $1.15 to $124.69 a barrel on the ICE Futures Exchange.

The dollar gained ground against the euro and the Japanese yen, making commodities less attractive to investors buying oil futures as a hedge against inflation and weakness in the US currency. By the afternoon in Europe, the euro stood at $1.5687 compared with $1.5752 late Monday in New York. The dollar also rose to 107.83 yen from 107.41 in the previous session.

Monday’s attack in Nigeria targeted two pipelines believed to be owned by a unit of Royal Dutch Shell PLC and was the latest in a two-year campaign of attacks on the country’s oil industry. Shell said a pipeline had been damaged in attacks and that some crude production had been shut down to prevent the oil from spilling into the environment. It gave no details. “The militant attacks on Shell’s pipelines are certainly supportive of oil pricing,” said Victor Shum, an energy analyst with consulting firm Purvin & Gertz in Singapore. “Shell has not divulged the extent of the disruption so it’s unclear how serious the pipeline attack is and so the market is really only reacting modestly.” “These attacks have of course happened in the past and caused temporary disruptions and so that’s what the market expects _ it’s been factored in,” Shum said. The Movement for the Emancipation of the Niger Delta says it is acting to force the Nigerian federal government to send more oil-industry funds to the southern region, which produces all of Nigeria’s crude oil but remains impoverished after decades of corrupt and wasteful governance.

Analysts at JBC Energy in Vienna, Austria, estimated the repeated attacks on the country’s oil installations meant Nigeria’s output had fallen to just below 1.9 million barrels a day from more than 2.4 million barrels a day in 2005. Shum said the militant attacks in Nigeria are keeping oil prices from slipping further on concerns that high fuel prices have hurt demand in the US _ the world’s largest energy consumer amid increasing uncertainty over the global economy. “The real impact of these reported militant attacks in Nigeria ... simply prevent oil pricing from being weighed down too much over slackening oil demand in the US,” he said. “Pricing in the near term looks quite stable around the $125 level.”

Crude futures have sharply fallen over the past two weeks. The price of oil has dropped in seven of the last 10 sessions, and is down about 15% from its peak above $147 a barrel earlier this month. Prices remain about 65% higher than at this time last year. Analysts said trading volumes were low, with the market awaiting US data later in the week for indications of how the world’s largest economy could be expected to perform in coming months.

Figures for GDP for the Q2 will be released Thursday, while July auto sales and the July employment report are both due Friday.

In other Nymex trading, heating oil futures fell 3.3 cents to $3.5290 a gallon (3.8 liters) while gasoline prices were down 0.68 cent to $3.0632 a gallon. Natural gas futures lost 3 cents to $9.133 per 1,000 cubic feet. (Economic Times)

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