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Oil gives up record as dollar rebounds

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Oil gives up record as dollar rebounds

U.S. consumption hit 
a 6-year low in April; 
fresh supply worries
July 1, 2008

New York

CRUDE-OIL FUTURES hit a record high Monday before pulling back on new indications of sinking U.S. demand and a rebound by the dollar.

Light, sweet crude for August delivery was down six cents to $140.15 a barrel at midday on the New York Mercantile Exchange after hitting a record of $143.67 a barrel in electronic trading. Brent crude on the ICE futures exchange traded 50 cents higher at $140.81 a barrel.

U.S. oil use in April was down 3.9% from a year ago and the lowest for that month since 2002, according to the U.S. Energy Information Administration, the statistical arm of the Department of Energy. Gasoline use was the lowest for April since 2003.

The data provided more proof that high oil prices are taking a toll on consumption in the world’s largest market for crude. While the market has in the past proved willing to move up after similar reports, futures hadn’t generated enough momentum on Monday to continue pushing higher.

The market “still hasn’t made what I would call a clean break of this congestion area,” between $132 and $140 a barrel, said Matt Zeman, head of trading at LaSalle Futures Group.

Mr. Zeman sees futures hitting $150 a barrel soon but added that large investors are likely waiting for prices to edge up to at least $144 a barrel before making the final push. “It’s a dangerous trade right now,” he said of bets that futures will move significantly higher.

As the energy agency released its revised April data, the dollar strengthened against the euro, providing a second reason for oil prices to fall, as investors use commodities as a hedge against a weakening dollar.

“The market has achieved many upside targets, but mostly it’s the dollar getting stronger,” said Tom Bentz, a broker and analyst with BNP Paribas.

The dollar is expected to be an especially potent force in the market this week, as there are indications that the European Central Bank will raise a key interest rate on Thursday. This will likely cause the dollar to weaken, which would spur investors to buy oil and other commodities as a hedge.

“The dollar may be headed for further weakness against the euro…and that’s not bearish for oil,” wrote Stephen Schork, editor of the Schork Report market newsletter.

Also, oil prices had other reasons to remain elevated. Militants attacked an oil facility in Nigeria over the weekend, although the amount of production knocked offline, if any, wasn’t known. Output from the major oil exporter has taken a severe blow in recent weeks, at a time when the market already perceived the global supply as tight.

And on Saturday, Iran reminded the world of the potential for a far greater supply disruption. The head of the country’s Revolutionary Guards said Iran, if attacked, would control shipping in the Straits of Hormuz, through which the majority of Middle Eastern oil must pass to reach world markets.

Iran and Israel have engaged in an escalating war of words over the past month, though the latest volley was unique in that it directly addressed the world oil market, analysts with JBC Energy in Vienna said in a note.–

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