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Oil price falls as US gasoline demand wanes

telegraph.co.uk

Oil price falls as US gasoline demand wanes

By James Quinn, Wall Street Correspondent

Last Updated: 6:46am BST 24/07/2008

The price of oil looks set to fall further in the coming days despite continued hurricane fears and concern over the political impasse between the United States and Iran.

  Oil prices may be dragged lower by a fall in consumption in the US
America is still the biggest driver of oil demand

Energy analysts argue that the value of “black gold” will see further reductions – having already fallen around $20 from highs above $147 a barrel just a week and a half ago.

Light sweet crude for September delivery fell $2.64 to $125.78 a barrel in trading on the New York Mercantile Exchange (NYMEX), adding to a $3 fall in the previous day’s session. In London, the cost of a barrel of Brent crude fell a further $2 to trade just above $127 a barrel.

Rob Laughlin, senior energy broker for MF Global, says that all of a sudden stocks are being viewed as cheap. “We’ve seen the exiting of some of the speculative fund money re-entering equity markets,” he said. “It’s the first time we’ve seen this since February/March time.”

He also believes that a reining in of consumption by what he calls “Mr and Mrs America” has also helped, as seen in recent data from Mastercard that showed US petrol demand fell 3.3pc last week, its 13th consecutive weekly fall.

The soaring price of gasoline has compounded the strains on America’s cash-strapped consumers, forcing Americans to drive less, or take up more efficient cars. Sales of luxury pick-up trucks and SUVs have tumbled 18pc in the last year.

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  • US oil inventories fell less than expected last week, down 1.6m barrels to 295.3m barrels, according to the latest report from the US Energy Information Administration.

    Data from the energy markets also shows that speculation is beginning to wane, as the number of outstanding oil future contracts dropped to their lowest level in 17 months, with open interest on NYMEX falling by 2.6pc to 1.23m contracts.

    Barclays Capital commodities analyst Kevin Norrish said: “People had a pretty good return in terms of investment activity, but with growing uncertainty about the global financial climate, it’s not surprising that people would want to take some risk off the market.

    “The fundamentals haven’t changed, but oil probably rose too high too fast,” he added.

    The recent price fall has come despite concerns over the future path of Hurricane Dolly, which on Wednesday was heading for landfall around the US-Mexican border, but had avoided the rigs in the Gulf of Mexico.

    The gulf accounts for around 25pc of all US oil production, and the fact that Dolly appears to have missed the area only added to yesterday’s price fall.

    Hopes of some form of peace talks between the US and Iran have also helped push the price down further, although MF Global’s Mr Laughlin remains sceptical as to whether such hope will become a reality.

    “Technically the market has the ability to come down to $120 a barrel, but will we see sub-$100, I think not. This is a retracement, not a complete collapse,” argues Mr Loughlin.

    But some in the market disagree, with Lehman Brothers’ chief energy economist, Ed Morse, arguing that oil is nearing a tipping point. Mr Morse, who drastically cut his forecast for growth in demand next year, said the price of crude oil will fall to an average of $90 a barrel in the first three months of 2009.

    “High prices and slower economic growth have driven oil demand in the US lower,” wrote Mr Morse in a research note. “With oil prices above $80 for nearly a year and income growth weakening, demand elasticity has begun to show signs of life.”

    His thesis is based on his belief that world demand has weakened overall, in spite of demand from China and other developing nations.

    Lehmans said it expects the price of crude oil to fall back to an average of $90 a barrel in the first quarter of 2009.

    It now forecasts annual oil demand for 2008 at 86.3m barrels a day, a growth of 790,000 bpd from 2007.

    The price of oil looks set to fall further in the coming days despite continued hurricane fears and concern over the political impasse between the United States and Iran.

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