Oil prices tumble for 2nd consecutive day

Oil prices tumble for 2nd consecutive day

Crude-oil futures tumbled for the second straight day on Tuesday ”” part of a broader commodity selloff that analysts ascribed to nervousness about rising inflation and interest rates.

There is also evidence that worldwide energy demand is growing more slowly and that is making the industry’s supply constraints seem less worrisome, analysts said.

A.G. Edwards & Sons commodity analyst Bill O’Grady said that as central banks make it more expensive to borrow money, they are reversing one of the key factors that helped foster multiyear runups ”” or what he called “asset bubbles” ”” in everything from real estate to emerging-market stock prices to commodities.

Now, investors are shifting into “less risky assets,” he said. “My hunch is that what is happening in the emerging markets is the signal to the commodity guys that they should be very careful.”

Michael Guido, director of commodity strategy at Societe Generale in New York, said the weakness in crude-oil prices is more directly linked to recent declines on global stock markets.

With equity values falling in recent weeks due to concerns about the impact inflation may have on economic growth, investors need to raise cash, Guido said, by liquidating their stakes in gold, silver and copper, which had made huge runups earlier in the year. “And because of the takedown in the metals market, it’s providing an anchor” for crude oil prices to sink as well, he said. “There is a contagion of selling.”

Light sweet crude for July delivery fell $1.80 to settle at $68.56 a barrel on the New York Mercantile Exchange, the lowest close since May 19. In London, July Brent crude futures declined by $2.01 to settle at $66.92 per barrel on the ICE Futures exchange.

Feeding into the bearish sentiment on oil markets was a monthly report from the International Energy Agency that forecast world crude-oil demand in 2006 would be lower than previously expected at a time when inventories in the U.S. and Asia are at a 20-year high.

On Monday, oil prices declined by $1.27 a barrel in part because of easing concerns about the potential threat to Gulf of Mexico oil production from Tropical Storm Alberto. Late last week the storm’s approach had stirred supply concerns.

The International Energy Agency on Tuesday slightly reduced its global oil demand growth forecast for this year to 1.24 million barrels a day from 1.25 million barrels a day. This is down approximately 30 percent from its growth estimate in January.

Also on Tuesday, oil officials in Turkey said twin pipelines carrying crude oil from
Iraq to Turkey are operating again after being down more than four months following insurgent attacks.

Iraq began pumping oil on Saturday and it is currently pumping around 21,000 barrels a day, said oil officials in Turkey who spoke on condition of anonymity because they were not authorized to address the media. Together the parallel pipelines can carry 1 million barrels a day.

Nymex gasoline futures fell by 7.25 cents Tuesday to settle at $2.0518 a gallon, while heating oil futures slid 5.97 cents to finish at $1.9316 a gallon.

Oil prices remain about 23 percent higher than a year ago because the world’s oil producers are pumping almost as much as they can in order to meet daily demand, leaving what is by historical standards a slimmer-than-usual cushion of surplus output capacity. With daily oil demand expected to be about 85 million barrels per day in 2006, this cushion is estimated to be around 2 million barrels per day, most of it in Saudi Arabia.

At the same time, threats to output abound.

In Iraq, insurgents regularly disrupt pipelines and other infrastructure. In Nigeria, militants have been able to hinder output by some 500,000 barrels per day. And in the United States, the expectation of another strong hurricane season looms over the industry, which is still recovering from the damage caused by Katrina and Rita.

But if oil demand growth continues to weaken, so will the associated risks of these supply threats, according to James Cordier, president of Liberty Trading in Tampa, Fla.

“The demand side of the equation has changed, which will allow for suppliers that were never extremely tight to become even more ample,” Cordier said, adding that oil prices could very easily drop to $60, assuming there are no major output disruptions this summer.

Associated Press

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