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Oil drops to $120 in Asia on demand concerns

business Updated: Aug 05, 2008 11:49 IST
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Oil prices fell to near US$120 a barrel on Tuesday in Asia on expectations the economic downturn in the US will erode consumer demand for crude products.

"The main factor weighing on oil prices is worries about oil consumption being weakened, especially in the US," said David Moore, a commodity strategist with Commonwealth Bank of Australia in Sydney.

Light, sweet crude for September delivery fell US$1.06 to US$120.35 a barrel in electronic trading on the New York Mercantile Exchange by midday in Singapore. The contract dropped US$3.69 overnight to settle at US$121.41 a barrel.

On Monday, the Commerce Department said consumer spending after adjusting for inflation fell 0.2 per cent in June _ the biggest drop since February _ as shoppers dealt with higher prices for gasoline, food and other items. The weak consumer spending data came despite the arrival of tax rebate checks, part of a stimulus package the government hoped would spur purchasing.

Oil prices also fell as Tropical Storm Edouard seemed less likely to disrupt oil and natural gas output in the Gulf of Mexico. Though Edouard was threatening to pick up strength from warm Gulf waters and gain near-hurricane speeds over the next 24 hours, it likely would not be strong enough to damage offshore oil and natural gas drilling platforms that sit in its path.

In London, September Brent crude was down US$1.05 at US$119.63 a barrel on the ICE Futures exchange.

Investors ignored continued tension over Iran's nuclear program. Representatives of the five permanent members of the UN Security Council and Germany agreed on Monday to seek new sanctions against Iran after the country failed to meet a weekend deadline to respond to an offer intended to defuse the dispute, State Department spokesman Gonzalo Gallegos said.

Iran's lack of response to an incentives package aimed at getting it to halt sensitive atomic activity left no option other than to pursue new punitive measures, Gallegos said.

Also on Monday Iran announced that it has tested a new weapon capable of sinking ships nearly 200 miles (320 kilometers) away, and Tehran reiterated threats to close a strategic waterway at the mouth of the Gulf if attacked. Up to 40 per cent of the world's oil passes through the Strait of Hormuz, a narrow passage along Iran's southern coast, and any move by Iran to close it to tanker traffic would send oil prices skyrocketing.

"Sometimes the focus of the market can shift, and at this point it's focused on some of the areas of weakness in demand," Moore said. "But some of the issues that caused oil prices to lift have not yet been resolved."

Crude futures have fallen about US$27, or about 18 per cent, since reaching a record high of US$147.27 on July 11.

In other Nymex trading, heating oil futures fell 2.36 cents to US$3.3265 a gallon (3.8 liters) while gasoline prices dropped 2.12 cents to US$2.979 a gallon. Natural gas futures decreased 10.5 cents to US$8.621 per 1,000 cubic feet.

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